Please double check your work
1) Foliage Companyâs 10 year bonds, which have a coupon of 4%, currently trade in the market at a 4.8%yield to maturity. If its marginal tax rate is 35%, what is the companyâs after-tax cost of debt?
2) Foliage Companyâs investment bankers told the company that it could issue a preferred stock with adividend of $5.50 and a price of $98. Issuance costs would be 1.2%. What is the companyâs cost ofpreferred stock?
3) Foliage Companyâs future earnings and dividends are expected to grow at a constant rate of 3% peryear. Its common stock currently trades at $15 per share. It paid a dividend of $2 per share yesterday.The company has a beta of 1.75. The current risk free rate is 2%, and the required return on the marketis assumed to be 12%. The company can issue bonds at a 4.8% yield to maturity.
a) Calculate the firmâs cost of equity using CAPM.
b) Calculate the firmâs cost of equity using the Dividend Yield + Growth rate model.
c) Calculate the firmâs cost of equity using the Bond Yield + Risk premium approach (assume the mid
point of the risk premium range of 3-5%).
d) Based on the above, what do you want to assume for the companyâs estimated cost of equity?
4) Assuming the companyâs current capital structure is its target capital structure, if Foliage Companyhas the following capital structure, what is the firmâs weighted average cost of capital (WACC)? (Usehighest cost of equity estimate in your calculations.)
Debt $100,000,000
Preferred Stock 20,000,000
Common Stock 200,000,000
5) If Foliage changes its target capital structure to increase the amount of debt by 50% and reduce the
amount of common equity by 25% (and does this by borrowing $50,000,000 and using the borrowedfunds to retire $50,000,000 of common stock), what is its new WACC? Why did the WACC decline?
Please double check your work
1) Foliage Companyâs 10 year bonds, which have a coupon of 4%, currently trade in the market at a 4.8%yield to maturity. If its marginal tax rate is 35%, what is the companyâs after-tax cost of debt?
2) Foliage Companyâs investment bankers told the company that it could issue a preferred stock with adividend of $5.50 and a price of $98. Issuance costs would be 1.2%. What is the companyâs cost ofpreferred stock?
3) Foliage Companyâs future earnings and dividends are expected to grow at a constant rate of 3% peryear. Its common stock currently trades at $15 per share. It paid a dividend of $2 per share yesterday.The company has a beta of 1.75. The current risk free rate is 2%, and the required return on the marketis assumed to be 12%. The company can issue bonds at a 4.8% yield to maturity.
a) Calculate the firmâs cost of equity using CAPM.
b) Calculate the firmâs cost of equity using the Dividend Yield + Growth rate model.
c) Calculate the firmâs cost of equity using the Bond Yield + Risk premium approach (assume the mid
point of the risk premium range of 3-5%).
d) Based on the above, what do you want to assume for the companyâs estimated cost of equity?
4) Assuming the companyâs current capital structure is its target capital structure, if Foliage Companyhas the following capital structure, what is the firmâs weighted average cost of capital (WACC)? (Usehighest cost of equity estimate in your calculations.)
Debt $100,000,000
Preferred Stock 20,000,000
Common Stock 200,000,000
5) If Foliage changes its target capital structure to increase the amount of debt by 50% and reduce the
amount of common equity by 25% (and does this by borrowing $50,000,000 and using the borrowedfunds to retire $50,000,000 of common stock), what is its new WACC? Why did the WACC decline?
