1)A company's common shares are currently trading at $50. It is expected that the company will pay an annual common share dividend of $3.50 next year. It is also expected that the dividend will grow at a rate of 4% each year in perpetuity. Based on the constant growth dividend discount model, what is the companies cost of common equity? Please show your work.

2)Suppose the current long-term government bond yield is 1.65% and the estimated market risk premium is 5%. If the company's beta is 0.9, estimate its cost of equity. Please show your work.

3)Suppose a company's capital structure consisted of 38% debt, 10% preferred shares, and 52% common equity. Assuming the company's cost of debt was 4.0%, the cost of preferred shares was 6.5%, and the cost of common equity was 9%, estimate the company's WACC. Last year, the company had an EBT of $100M and paid $36M in tax. Please show your work.

4)Consider the same estimated costs as in question 23. The company is not planning to issue preferred shares in the future but anticipates a target capital structure of 40% debt and 60% common equity. Re-estimate it's WACC. Please show your work.

5)Explain whether a company would consider investing in any project with an expected return less than the company's estimated WACC.

Answer rating: 100% (QA)

Companys Cost of Capital Calculations 1 Constant Growth Dividend Discount Model DDM We can use the constant growth DDM formula to find the cost of equ... View the full answer