Reference no: EM132419032
Problem: Floyd Industries common stock (1,800,000 shares) has a beta of 1.5. The company just paid a dividend of $.80, and the dividends are expected to grow at 5% per year. The expected return on the market is 12%, and Treasury bills are yielding 5.5%. The most recent stock price for Floyd is $61.
It has 40,000 semi-annual-coupon bonds with a 7% coupon rate, a par value of $1000, and a current price quote of 119.80%; the bonds have 25 years to maturity.
It also has 100,000 shares of 4% dividend preferred stock with a current price of $78, and a par value of $100.
Ignore all floatation costs. The tax rate is 40%.
Required:
Question 1: Calculate the cost of equity using the DCF method.
Question 2: Calculate the cost of equity using the CAPM method.
Question 3: Calculate the before-tax cost of debt.
Question 4: Calculate the cost of preferred stock.
Question 5: What are the percentages of total value of Floyd in equity, debt and preferred stock?
Question 6: What is Floyd's WACC, assuming cost of equity as average of (a) and (b)?
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