QUESTION THREE The following information has been collected from the books of Billick Brother company: Capital structure
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QUESTION THREE
- The following information has been collected from the books of Billick Brother company:
- Capital structure consisting of 40% debt and 60% equity
- The company has 20year bonds outstanding at 9% annual coupon that are trading at par
- The company tax rate is 40%
- The risk free rate is 5.5%
- The market risk premium is 5%
- The stock's beta is 1.4
Required: Estimate the weighted average cost of capital
- Suppose X Ltd is expected to pay $2 cash dividend at the end of the year. The required rate of return of the stock of X Ltd is 15%. If the share of X Ltd is currently selling at $40, what is the expected growth rate in the dividends of X Ltd. (5 marks)
- The cost of capital is 15% and the before tax cost of debt is 9%. The market value of debt is $50 million and the market value of equity is $50 million. Given that the marginal income tax rate is 40%, calculate the cost of equity. (5 marks)
- D Ltd.'s optimal capital structure is; debt: 25%, preferred stock 15%, common stock 60%. D Ltd.'s expected net income for the year is $35,000. It has established a dividend payout ratio is 30%, the corporate tax is 40%, the investors expect the future earnings and dividends to grow at a constant rate of 9%. D Ltd paid a dividend of $3 per share last year and its stock is currently selling for $40 per share. D Ltd can obtain new capital as follows;
New preferred stock with a dividend of $11 per share can be sold for $95 per share. Debt can be sold at an interest rate of 12%.
Calculate the Weighted Average Cost of Capital (WACC). (10 marks)
Related Book For
Intermediate Accounting
ISBN: 978-0324592375
17th Edition
Authors: James D. Stice, Earl K. Stice, Fred Skousen
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