Question
The Finance Co. has 814,508 shares of common stock, currently trading at $47/share. The common stock of Finance Co. is expected to pay a dividend
The Finance Co. has 814,508 shares of common stock, currently trading at $47/share. The common stock of Finance Co. is expected to pay a dividend next year of $2/share, and it has a Beta calculated at 1.75. It also has 37,023 shares of preferred stock, trading at $94/share. The preferred stock pays dividends of 10%. Finally, Finance Co. has 18,942 bonds currently trading at $1120/bond. The coupon rate is 6%, and the bonds will mature in 26 years. Finance Co. expects its dividends to grow at a rate of 18%/year, and it is in a 21% tax bracket. It estimates that the risk free rate of return is 3% and the market rate of return is 17.5%. Calculate the WACC for Finance Co. Be sure to show all your work. NOTE: When calculating the cost of equity, compute the cost using the CAPM method and the DCF (Dividend Constant Growth Method) and average the two.
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