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Doubled Inc has 40 million ordinary shares on issue trading at $12, and 12 million preference shares (preferred stock) on issue trading at $10. Doubled Inc. is a dividend-paying company.
The growth rate in the ordinary dividends is 3%, whereas the preference shares pay a constant dividend of $1.5 per share. The company has just paid an ordinary dividend of $0.80 per share. Doubled Inc. is a levered company. The market value of Doubled Inc's debt is $200 million and the debt will mature in 6 years. The coupon rate on Doubled Inc's debt is 7% and the pre-tax cost of this debt is 8%. The corporate tax rate is 30%.
1. What is the total market value of Doubled Inc?
2. Calculate the following: weight of equity, weight of preferred stock and weight of debt.
3. Calculate the cost of ordinary equity.
4. Calculate the cost of preferred stock.
5. Calculate the weighted average cost of capital (WACC).
6. Why is the cost of equity higher than the cost of debt?
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