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Estimate the weighted average cost of capital for cola

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Reference no: EM132988487

The Cola Beverage Co. common stock is currently trading on the NASDAQ at $22 per share with 8,000,000 shares outstanding. Dividend just paid is $0.8 per share and is forecasted to grow at a constant rate of 6% in the future.

  • Cola Beverage Co. has 5-year debt with a face value of $10 million outstanding. The debt pays 6% annual interest and it currently trades at 102% of face value. The risk-free rate of interest, based on current yields on U.S. Treasury Notes, is 2.4%. The expected rate of return for the S&P 500 stock index (a proxy for the market) is 6%. Cola Beverage's corporate tax rate is 35% and its estimated beta coefficient for risk is 0.8.

Problem a). Estimate the cost of common equity capital for Cola Beverage Co. using the dividend growth model

Problem b). Estimate the cost of common equity capital for Cola Beverage Co. using the capital asset pricing model (CAPM)

Problem c). Estimate the weighted average cost of capital (WACC) for Cola Beverage Co.

Reference no: EM132988487

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