John has just been hired as the new chief financial officer of MARKET ENTERPRISE, a listed company. It is reviewing the criteria used to evaluate investments, since up to now, a discount rate of 7%, arbitrarily chosen, has been used. The data it counts on are the following: - Recently paid dividend: 1 dollar per share. - Share price: 12.50 dollar - Number of shares outstanding: 5,000,000 (5 million). - Dividend growth rate of the company: 1.75% per year. - The company's balance sheet data show the following data in its liabilities: -Total debt: 24,000,000 - Equity: 46,000,000 -Total Equity and Liabilities: 70,000,000 - The company's Beta is 1.2 .
The risk-free return is estimated at 5% and the market average profitability at 9%. - The tax rate is 25%.
A) Calculate the cost of equity by the constant growth model and CAPM model.
B) Calculate the cost of debt capital/borrowed capital.
C) Calculate the Weighted Average Cost of Capital (WACC) for the constant growth model at book value and at market value.
D) Calculates the Weighted Average Cost of Capital (WACC) for the CAPM model at book value and at market value.