Growth Company's current share price is $20.05 and it is expected to pay a $1.15 dividend per share next year. After that, the firm's dividends are expected to grow at a rate of 4.4% per year. a. What is an estimate of Growth Company's cost of equity? b. Growth Company also has preferred stock outstanding that pays a $1.85 per share fixed dividend. If this stock is currently priced at $28.30, what is Growth Company's cost of preferred stock? c. Growth Company has existing debt issued three years ago with a coupon rate of 5.5%. The firm just issued new debt at par with a coupon rate of 6.2%. What is Growth Company's pretax cost of debt? d. Growth Company has 4.7 million common shares outstanding and 1.1 million preferred shares outstanding, and its equity has a total book value of $50.0 million. Its liabilities have a market value of $20.1 million. If Growth Company's common and preferred shares are priced as in parts (a) and (b), what is the market value of Growth Company's assets? e. Growth Company faces a 22% tax rate. Given the information in parts (a) through (d), and your answers to those problems, what is Growth Company's WACC? Note: Assume that the firm will always be able to utilize its full interest tax shield.
Growth Company's current share price is $20.05 and it is expected to pay a $1.15 dividend per share next year. After that, the firm's dividends are expected to grow at a rate of 4.4% per year. a. What is an estimate of Growth Company's cost of equity? b. Growth Company also has preferred stock outstanding that pays a $1.85 per share fixed dividend. If this stock is currently priced at $28.30, what is Growth Company's cost of preferred stock? c. Growth Company has existing debt issued three years ago with a coupon rate of 5.5%. The firm just issued new debt at par with a coupon rate of 6.2%. What is Growth Company's pretax cost of debt? d. Growth Company has 4.7 million common shares outstanding and 1.1 million preferred shares outstanding, and its equity has a total book value of $50.0 million. Its liabilities have a market value of $20.1 million. If Growth Company's common and preferred shares are priced as in parts (a) and (b), what is the market value of Growth Company's assets? e. Growth Company faces a 22% tax rate. Given the information in parts (a) through (d), and your answers to those problems, what is Growth Company's WACC? Note: Assume that the firm will always be able to utilize its full interest tax shield.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Concept explainers
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
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Transcribed Image Text:c. Growth Company has existing debt issued three years ago with a coupon rate of 5.5%. The firm just issued new debt at par with a coupon rate of 6.2%. What is Growth Company's cost of debt? (Select from the drop-down menus.)
The pre-tax cost of debt is the firm's YTM on current debt. Since the firm recently issued debt at par, then the coupon rate of that debt must be
the YTM of the debt. Thus, the pre-tax cost of debt is
d. Growth Company has 4.7 million common shares outstanding and 1.1 million preferred shares outstanding, and its equity has a total book value of $50.0 million. Its liabilities have a market value of $20.1 million. If Growth Company's common and preferred shares are priced as in parts (a) and (b), what is the market value of
Growth Company's assets?
The market value of assets is $ million. (Round to two decimal places.)
e. Growth Company faces a 22% tax rate. Given the information in parts (a) through (d), and your answers to those problems, what is Growth Company's WACC?
The weighted average cost of capital is
%. (Round to two decimal places.)
Transcribed Image Text:Growth Company's current share price is $20.05 and it is expected to pay a $1.15 dividend per share next year. After that, the firm's dividends are expected to grow at a rate of 4.4% per year.
a. What is an estimate of Growth Company's cost of equity?
b. Growth Company also has preferred stock outstanding that pays a $1.85 per share fixed dividend. If this stock is currently priced at $28.30, what is Growth Company's cost of preferred stock?
c. Growth Company has existing debt issued three years ago with a coupon rate of 5.5%. The firm just issued new debt at par with a coupon rate of 6.2%. What is Growth Company's pretax cost of debt?
d. Growth Company has 4.7 million common shares outstanding and 1.1 million preferred shares outstanding, and its equity has a total book value of $50.0 million. Its liabilities have a market value of $20.1 million. If Growth Company's common and preferred shares are priced as in parts (a) and (b), what is the market value of
Growth Company's assets?
e. Growth Company faces a 22% tax rate. Given the information in parts (a) through (d), and your answers to those problems, what is Growth Company's WACC?
Note: Assume that the firm will always be able to utilize its full interest tax shield.
a. What is an estimate of Growth Company's cost of equity?
The required return (cost of capital) of levered equity is %. (Round to two decimal places.)
b. Growth Company also has preferred stock outstanding that pays a S1.85 per share fixed dividend. If this stock is currently priced at $28.30, what is Growth Company's cost of preferred stock?
The cost of capital for preferred stock is%. (Round to two decimal places.)
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