Question
The Allied Group intends to expand the company's operationby making significant investments in several opportunities available to thegroup. Accordingly, the group has identified a need
The Allied Group intends to expand the company's operationby making significant investments in several opportunities available to thegroup. Accordingly, the group has identified a need for additional financing inpreferred and new common stock and new bond issues. The risk-free rate for thecompany is 7%, and the appropriate tax rate is 40%. Also, the beta coefficientfor the company is 1.3 and the market risk premium (Km) is 12.
New Debt
The company has been advised that new bonds can be sold onthe market at par ($1000) with an annualcoupon of 8%, for 30 years.
New Common Stock
Market analysis has determined that given the positivehistory of the firm, new common stock can be sold at $29 per share, with thelast dividend being been estimated at a constant rate of 15% per year for thenext 3 years.
Preferred Stock
New Preferred Stock can be issued with an annual dividend of10% of par and is paid annually and currently would sell for $90 per share.
Questions: Address all of the following questions in a briefbut thorough manner.
Using the Capital Asset Pricing Model (CAPM), discuss andcalculate the cost of new common stock.
What would the dividend yield as a percentage (i.e., perdividend payment divided by the book value of a share of stock) today and ayear from now if the growth rate is 12%?
What is the after tax component cost as a percentage (e.g.,interest rate) of new debt today?
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