Question
You are given the following information concerning Delta plc: Common stock: 100,000 shares. The current share price is 12, and the book value per share
You are given the following information concerning
Delta plc: Common stock: 100,000 shares. The current share price is 12, and the book value per share is 2. The stock has a beta of 1.6 and is expected to pay a dividend of 1 one year from today. The dividends are expected to grow by 4% per year indefinitely. Debt: 1,000 bonds outstanding, with 10 years to maturity, a coupon rate of 8% and a face value of 1,000.
The bonds make semiannual coupon payments and the current price is 1,148.775 per bond. Preferred stock: 10,000 shares of preferred stock, selling at 80 per share. The annual dividend payment for preferred stock is 8 per share. The market risk premium is 5% and the standard deviation of the returns of the market is 15% per annum. Treasury bills are yielding 3% and the corporate tax rate is 20%.
i) Calculate the cost of common stock using the dividend growth model method and the security market line (SML) method.
ii) What are the advantages and disadvantages of the dividend growth model method and the security line (SML) method?
iii) Find the respective weights of all of the securities for the purpose of calculating the weighted average cost of capital (WACC).
iv) What is Deltas weighted average cost of capital (WACC)? (9 marks) v) Delta is considering project A, which has an expected return of 7%. The return of Project A has a standard deviation of 12% per annum and a correlation with the market of 0.8. Would you advise the management of Delta to proceed with the project? Support your answer by showing the relevant calculations.
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