Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

Stock of Gao Computing sells for $50, and dividend of last year was $2.10. Flotation cost of 10% would be needed to issues new common stock.

Gao's favoured stock pays the dividend of $3.30 per share, and new favoured could be sold at the price to net company $30 per share.

Security analysts are projecting that common dividend will grow at the rate of 7% a year.

The company can also issue extra long-term debt at the interest rate (or before-tax cost) of 10%, and its marginal tax rate is 35%.

Market risk premium is= 6%, risk free rate is= 6.5%, and Gao's beta is= 0.83.

In its cost-of-capital computations, Gao uses the target capital structure with 45% debt, 5% favoured stock, and 50% common equity

i) Compute cost of each capital component, like, after-tax cost of debt, cost of preferred stock, cost of equity (ignoring flotation costs) with DCF method and CAPM method.

ii) Compute cost of new stock by using DCF model.

iii) Determine the cost of new common stock, based on CAPM? Determine the difference between ke and ks as determined by the DCF method, and add that differential to CAPM value for ks.

iv) By using target capital structure for Gao Computer and suppose that it will not issue new equity, will continue to use similar capital structure, determine the WACC?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M914105

Have any Question? 


Related Questions in Basic Finance

Explain why an options time value is greatest when the

Explain why an option's time value is greatest when the stock price is near the exercise price and why it nearly disappears when the option is deep-in- or out-of-the-money? Critique the following statement, made by an op ...

1 is it more desirable to have the operating ratios

1. Is it more desirable to have the operating ratios increasing or decreasing for utilities and transportation companies? 2. What type of ratio is operating revenue to operating property? Will it exceed 1:1 for a utility ...

1 how can tax law changes create incentives for investors

1. How can tax law changes create incentives for investors to sell their properties to other investors? 2. How important are taxes in the decision to sell a property? 3. Are tax considerations important in renovation dec ...

Zapata corporation will pay dividends of 500 600 and 700 in

Zapata Corporation will pay dividends of $5.00, $6.00, and $7.00 in the next three years. Thereafter, the company expects its dividend growth rate to be a constant 10 percent. If the required rate of return is 15 percent ...

1 devise a local search heuristic for the service network

1. Devise a local search heuristic for the service network design problem in which an individual move is to remove an existing arc or to add a new arc to the current solution. 2. Show that the deterministic VAP with mult ...

The mz mortgage company is issuing a cmo with three

The MZ Mortgage Company is issuing a CMO with three tranches. The A tranche will consist of $40.5 million with a coupon of 8.25 percent. The B tranche will be issued with a coupon of 9.0 percent and a principal of $22.5 ...

Does the estimated maximum preload threaten your boltsyou

Does the estimated maximum preload threaten your bolts? You guess, since this is a conventional or typical joint, that the joint to bolt stiffness ratio is 5:1. You believe that the tensile loads applied to this joint in ...

1 what is multiple regression and how is it used in

1. What is multiple regression, and how is it used in behavioral science research? 2. What is a spurious relationship? 3. What is the difference between a common-causal variable, an extraneous variable, and a mediating v ...

1 why is motor carrier freight transportation the most

1. Why is motor carrier freight transportation the most preferred method of product shipment? 2. What is the economic justification for the recent rapid growth of premium package services? 3. Why is it important for a lo ...

1 labor budget calculating the fixed labor budget instead

1. Labor budget: calculating the fixed labor budget. Instead of the benefits stated in Exhibit l.4e, assume that all benefits are 210/6 and all raises are 3.5% and calculate the fixed labor budget for January, February, ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro