The capital structure of a company with relevant market information are shown as below:

Common stock: There are 55 million shares outstanding of $10 par. The stock has a beta coefficient of 1.8. The management of the company just paid an annual dividend of $1.5 per share and the market expects that the dividend growth rate to be 20 percent for coming three years and grow by 5 percent per year thereafter in the foreseeable future. The required rate of return on your company’s stock is 15 percent.

Preferred stock: 12 million shares currently selling at $96 per share, with dividend rate of 6 percent and face value of $100.

Debt: Three years ago, the company issued 9 million 15-years 8% semi-annual coupon bonds with par value of $1,000 that are still outstanding. The yield-to-maturity (in terms of an effective rate of return) on the bond is 16% per annum.

Market: The current Treasury bill yields 3 percent and the expected return on the market is 12 percent. The company is in the 40% corporate tax bracket. Required:

(a) Estimate the current common stock value using the Dividend Growth Model. (10 marks) (b) Calculate the bond price today. [answers in a whole dollar amount] (7 marks)

(c) Based on answers in above (a) and (b), determine the company’s capital structure weights (WE, WP, WD) for equities and debt. [answers in %] (6 marks)

(d) Compute the cost of equity (RE) using CAPM, cost of preferred stock (RP), and pre-tax cost of debt (RD). [answers in %] (6 marks)

(e) Assuming that the company is going to maintain the current capital structure, calculate the weighted average cost of capital (WACC) of the company. [answer in %] (2 marks)

Answer rating: 100% (QA)

Solution a Current common stock value using the Dividend Growth Model The current dividend paid by t... View the full answer