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(1) GoAhead Automobile Company has 4 million common shares outstanding and 1 million preferred shares outstanding, and its equity has a total book value of $60 million. The tax rate is 20%. On January 1 2019, the company’s current share price is $30. It has just paid a $1 dividend per share on December 31 2018. The firm’s dividends are expected to grow at a rate of 6% per year thereafter. It also has preferred stock outstanding that pays a $2 per share fixed dividend and is currently priced at $25. The firm has 40,000 existing bonds issued three years ago with an annual coupon rate of 6% maturing at the beginning of 2025. Each bond is currently trading at a price of $1050 for a face value of $1000. Calculate the company’s cost of equity, cost of preferred stock, yield-to-maturity of the company’s existing bonds as of January 1 2019. What is the company’s WACC?
(2) GoAhead Automobile Company is evaluating an extra dividend versus a share repurchase. In either case $4000 would be spend. Current earnings are $2.1 per share, and the stock currently sells for $46 per share. There are 800 shares outstanding. Ignore taxes and other imperfections: (i) Evaluate the two alternative in terms of the effect on the price per share of the stock and shareholder wealth; (ii) what will be the effect on the firm’s EPS and PE ratio under the two difference?


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