Question: The current share price of XX company is $8 and last year dividend was $0.20. Preferre shares were issued few years back which pays a dividend of $0.33 per share and currently trades at $4.50 per share.
Security analysts projects that the ordinary dividends will grow at a rate of 5% a year. The firm also issued 10-year 6% coupon (semi-annual) bonds two years ago. The face value is $1000 and the last traded price was $990.
The market risk premium is 6%, the risk free rate is 3% and XX company beta is 0.8. The firm uses a target capital structure with 45% debt, 5% preferred shares and 50% ordinary shares. the firm's marginal tax rate is 17%.
(1) find the cost of equity by applying both Capital asset pricing model and gordon growth model.
(2) find the cost of preference share and cost of debt
(3) find the weighted average cost of capital. in doing so, use the average cost of equity derived in (1)