Question
Steady Companys current share price is $18 and it is expected to pay a $1.10 dividend per share next year. After that, the firms dividends
Steady Companys current share price is $18 and it is expected to pay a $1.10 dividend per share next year. After that, the firms dividends are expected to grow at a rate of 3% per year. a) What is an estimate of Steady Companys cost of equity? (1 mark) b) Steady Company also has preference shares outstanding that pay a $2.20 fixed dividend. If this share is currently priced at $30, what is Steady Companys cost of preference shares? (1 mark) c) Steady Company has existing debt issued three years ago with a coupon rate of 7%. The firm just issued new debt at par with a yield of 7.5%. What is Steady Companys pre-tax cost of debt? (1 mark) d) Steady Company has five million ordinary shares outstanding and one million preference shares outstanding, and its equity has a total book value of $50 million. Its debts have a market value of $20 million. If Steady Companys ordinary and preference shares are priced as in parts a) and b), what is the market value of Steady Companys assets? (1 mark) e) Steady Company faces a 30% tax rate. Given the information and your answers in a) to d) above, calculate Steady Companys WACC?
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