ABC Limited current share price is $20 and it has just paid a $1 dividend. As ABC is a mature firm, this $1 dividend is expected to grow at a rate of 4% per year. What is an estimate of the return shareholders of ABC Ltd expected to earn?
(b) ABC also has preference shares outstanding that pays $2 per share fixed dividend. If this stock is currently priced at $24, what is the return that preference shareholders expect to earn?
(c) ABC has issued a 5 year bond with a coupon rate of 11% and face value of $1,000. The price received by ABC was $1,200. What is ABC’s pre-tax cost of debt?
(d) ABC has 5 million ordinary shares outstanding and 1 million preference shares outstanding. Its debt have a market value of $20 million. If Growth Company’s common and preferred shares are priced as in parts (a) and (b), what is the market value of ABC Limited?
(e) ABC faces a 30% tax rate. Given the information in parts (a) – (d), and your answers to those problems, what is ABC’s WACC?
