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Problem - A financial analyst determines that GMB Company has $350 million of interest bearing debt outstanding and 4,800,000 common shares outstanding at the end of 2019. She also estimates that Rainbow's after-tax cost of debt is 5.0% and that its cost of equity using the capital asset pricing model is 9.5%. The company pays a $2.80 dividend and has a current stock price $42 per share. The company has a marginal income tax rate of 33%.
a. Compute GMB's average borrowing rate.
b. Compute the company's weighted average cost of capital.
c. Assuming that GMB's dividend will last into perpetuity what cost of equity capital is inferred by the current stock price?
d. Assuming that the financial analyst has properly calculated the cost of equity capital and that GMB will pay a dividend of $3.20 next year what growth rate is implied by the current stock price?
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