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
Problem 1PS
Related questions
Question
8. Growth Company's current share price is $20.00 and it is expected to pay a $1.30 dividend per share next year. After that, the firm's dividends are expected to grow at a rate of 3.7% per year.
d. Growth Company has 5.3 million common shares outstanding and 1.5 million preferred shares outstanding, and its equity has a total book value of $50.1 million. Its liabilities have a market value of $20.3 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 21% 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.
**round to two decimal places**
Transcribed Image Text:Growth Company's current share price is $20.00 and it is expected to pay a $1.30 dividend per share next year. After that, the firm's dividends are expected to grow
at a rate of 3.7% 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 $1.95 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 5.7%. The firm just issued new debt at par with a coupon rate of 6.5%. What is
Growth Company's pretax cost of debt?
d. Growth Company has 5.3 million common shares outstanding and 1.5 million preferred shares outstanding, and its equity has a total book value of $50.1 million.
Its liabilities have a market value of $20.3 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 21% 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 10.20 %. (Round to two decimal places.)
ig
b. Growth Company also has preferred stock outstanding that pays a $1.95 per share fixed dividend. If this stock is currently priced at $28.30, what is Growth
y Company's cost of preferred stock?
The cost of capital for preferred stock is 6.89 %. (Round to two decimal places.)
c. Growth Company has existing debt issued three years ago with a coupon rate of 5.7%. The firm just issued new debt at par with a coupon rate of 6.5%. 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 equal to
the
YTM of the debt. Thus, the pre-tax cost of debt is 6.5%
Adv
d. Growth Company has 5.3 million common shares outstanding and 1.5 million preferred shares outstanding, and its equity has a total book value of $50.1 million.
Its liabilities have a market value of $20.3 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.)
n is
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education