Suppose George Weston Ltd. has a corporate tax rate of 40% and has the following financing outstanding: Common Stock: 800,000 shares and beta of stock is 1.5. The expected return on the market is 8% and the risk-free rate is 5%. The company just paid a dividend of $1.5, and the dividends are expected to grow at 5% per year forever. Preferred Stock: 100,000 shares of 5% preferred stock with a current price of $90 and a par value of $100. Debt 1: 40,000 semi-annual coupon bonds with 12% coupon rate and 12% yield to maturity; the bonds have 25 years to maturity and face value of $1000. Debt 2: 60,000 Zero-coupon bonds with 10 years to maturity and it sells at 80 percent of the face value of $1000. 

a) Calculate George Weston’s cost of equity. 

b) Calculate George Weston’s current stock price. 

c) If the actual common stock price of the firm is less than what you have calculated in b). What does this say about its actual return compared to what is predicted by the Security Market Line (SML)? What would you expect to happen to the stock price? Explain why you believe that a price change would occur. 

d) What is the weighted average cost of capital (WACC) for the company?

Answer rating: 100% (QA)

a Cost of Equity Cost of equity is computed by CAPM As per CAPM Re Rf BetaRm Rf Thus Re 005 15008 005 Re 005 0045 0095 ie 95 Thus Cost of Equity os 95 ... View the full answer