Delta, Inc. has a stock price of $50. In the fiscal year just ended, dividends were $2.00. Earnings per share and dividends are expected to increase at an annual rate of 8 percent. The risk-free rate is 4 percent, the market risk premium is 6.4 percent and the beta on Delta’s stock is 1.25. Delta’s target capital structure is 40% debt and 60% common equity. Delta’s tax rate is 40 percent.
Delta can sell bonds that mature in 25 years with a par value of $1,000 and an 8% coupon rate paid annually for $960.
a. Calculate the before-tax cost of debt.
b. Calculate the after-tax cost of debt.
c. Calculate the required return on the firm’s stock using CAPM.
d. Calculate the required return on the firm’s stock using the dividend growth model.
e. Calculate the WACC using the CAPM for cost of equity.