(Capital Asset Pricing Model and WACC) You have the following information for the company ABC.
The “beta” coefficient for ABC is 1.25 based on the past information.
The 30-day T-bill rate is 1.5%,
The 5-year average market return of (say, S&P 500 index) in the same period is 11%.
Answer the following questions:
a) What is the required return for ABC?
13.4% = 1.5 + 1.25(11-1.5)
b) Suppose that ABC's current dividend is $1.24 per share with possible expected growth rate as 5% per year from now on, what is your assessment for the value of ABC’s stock?
1.24*(1.05)/(.134-.05) = $15.5
c) Suppose the current market price for the ABC’s stock is $20.8 per share. Let the capital market be efficient as ideally assumed. That is, the current stock price is equal to the stock fair value. What is the required return for this stock now if the information in (b) still applies? What is the “beta” associated with this stock now?
D) ABC has the following capital structure: the firm issued 5 million shares of common stock with the stock price in c), the firm also issued 500, 000 shares of preferred stock with $14.5 preferred dividend per share, currently, ABC has $25 million in debts with interest rate as 6.5%. Suppose the current preferred stock price is $60 per share. The corporate tax rate is 40%. What is the weighted average cost of capital for ABC?