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Growth? Company's current share price is $20

Finance

Growth? Company's current share price is $20.10?, and it is expected to pay a $1.00 dividend per share next year. After? that, the? firm's dividends are expected to grow at a rate of 3.9% 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 $2.20 per share fixed dividend. If this stock is currently priced at $28.25?, what is Growth? Company's cost of preferred? stock?

c. Growth Company has existing debt issued three years ago with a coupon rate of 5.6%. The firm just issued new debt at par with a coupon rate of 6.2%. What is Growth? Company's cost of? debt?

d. Growth Company has 5.2 million common shares outstanding and 1.3 million preferred shares? outstanding, and its equity has a total book value of $50.3 million. Its liabilities have a market value of $20.2 million. If Growth? Company's common and preferred shares are priced at $20.10 and $28.25?, ?respectively, what is the market value of Growth? Company's assets?

e. Growth Company faces a 38% tax rate. Given the information in parts a through d and your answers to those? problems, what is Growth? Company's WACC?

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a). Computation of the cost of equity:-

Cost of equity = (D1 / Current share price) +Growth rate

= ($1 / $20.10) + 3.9%

= 4.98% + 3.9%

= 8.88%

?b). Computation of the cost of preferred stock:-

Cost of preferred stock = Annual dividend / Current price

= $2.20 / $28.25

= 7.79%

c). The cost of debt is the firm's YTM on current Debt .Since the company recently issued debt at par, the coupon rate of the debt must be equal to the YTM of the debt. Thus the cost of debt = 6.2%

d). Market value of assets = $161,445,000

e). WACC = 8%

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