Given the following information for Bajor Co.:
Debt: Bajor’s long-term debt capital consists of bonds with 6.250 percent coupon rate (semiannual coupon payments), 9 years time to maturity, and current price of 106.61 percent of its par value.
Preferred stock: Bajor has not issued any preferred stocks.
Common stock (equity):
Bajor’s equity capital consists of common stocks with the most recent annual dividend of $0.92 per share, and a current stock price of $14 per share.
According to online data sources, Bajor’s long-term dividend growth (for next 5-Year average, per annum) g = 4.5% per year.
The “risk-free” Treasury bill return is 3.8%; the market expected return for the stock market on average is 12.3%; and Bajor’s systematic risk (Beta) is 0.71.
Taxes: The applicable federal-plus-state corporate tax rate for Bajor is 40 percent.
Capital weight: Bajor’s “Market Capitalization” amounts to $18.23 billion, and “Total Debt” amounts to $14.44 billion. You can use such data to estimate the capital weights for equity and debt, respectively (We and Wd).
Time constraint: For any investment projects, Bajor are required by her investors to recover its initial cost within no more than 6 years.
1: What is Bajor’s pretax cost of debt Rd, cost of equity Re, and WACC, respectively? (Hint: For the best estimate of cost of equity Re, you shall apply both CAPM and Dividend Growth Model and then average the two estimates.)