Question

Growth​ Company's current share price is

$19.85​, and it is expected to pay a $1.05
dividend per share next year. After​ that, the​ firm's dividends are expected to grow at a rate of
3.6% 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
$28.00​, what is Growth​ Company's cost of preferred​ stock?
c. Growth Company has existing debt issued three years ago with a coupon rate of
6.2%.
The firm just issued new debt at par with a coupon rate of
6.7%. What is Growth​ Company's cost of​ debt?
d. Growth Company has 4.8 million common shares outstanding and 1.4 million preferred shares​ outstanding, and its equity has a total book value of $50.2 million. Its liabilities have a market value of $19.9
million. If Growth​Company's common and preferred shares are priced at
$19.85 and $28.00​, ​respectively, what is the market value of Growth​ Company's assets?

Answer 1

a. The estimate for the cost of equity is 5.3%. b. The cost of preferred stock is 6.96%. c. The cost of debt is 6.2%. d. The market value of Growth Company's assets can be calculated as the sum of its equity and liabilities.

Step-by-step explanation:

a. To estimate Growth Company's cost of equity, we can use the dividend discount model (DDM) which is calculated as the dividend per share divided by the share price. In this case, the dividend per share next year is $1.05 and the current share price is $19.85. So, the estimated cost of equity is $1.05/$19.85 = 0.053 or 5.3%.

b. The cost of preferred stock can be calculated as the fixed dividend divided by the current share price. In this case, the fixed dividend is $1.95 and the current share price is $28.00. So, the cost of preferred stock is $1.95/$28.00 = 0.0696 or 6.96%.

c. The cost of debt can be calculated as the coupon rate on the existing debt. In this case, the coupon rate is 6.2%.

d. The market value of Growth Company's assets can be calculated as the sum of its equity and liabilities. In this case, the market value of equity is calculated as the market price per share multiplied by the number of shares, which is ($19.85 * 4.8 million) + ($28.00 * 1.4 million). The market value of liabilities is $19.9 million. So, the market value of assets is ($19.85 * 4.8 million) + ($28.00 * 1.4 million) + $19.9 million.