Answer the following questions regarding company
a) Consider the following information for company:
Current market price per share $50.00
Most recent dividend paid per share $2.00
Expected dividend payout rate 50%
Return on equity 10%
Beta coefficient for common stock 1.00
Expected return on the market portfolio 9%
Return on government treasury bills 3%
(i) Using the discounted cash flow/dividend growth model, what is the cost of equity capital?
(ii) Using the Capital Asset Pricing Model (CAPM) approach, what is the cost of equity capital?
b) In addition to the information in part a) above, consider the following:
Company currently has 1.5million common shares outstanding and long term bonds with a face value of $40 million, 5% coupon (paid semiannually), 10years remaining to maturity and priced to yield 6%, i.e. yield to maturity is 6%. The corporate tax rate is 40%. If company decides to raise $12.5 million of new capital to finance an expansion project while maintaining the current debt-to-equity ratio, what is the appropriate weighted average cost of capital (WACC) for the project, assuming it has the same risk characteristics as the company? Use the CAPM approach.