Question
The following tabulation gives earnings per share figures for Powell Manufacturing during the preceding 10 years. The firm's common stock, 140,000 shares outstanding, is now selling for Rs.50 a share, and expected dividend for the coming year (2008) is 50% of EPS for the year. Investors expect past trends to continue, so "g" may be based on the historical earnings growth rate.
|
Year
|
EPS (Rs)
|
|
1998
|
2.00
|
|
1999
|
2.16
|
|
2000
|
2.33
|
|
2001
|
2.52
|
|
2002
|
2.72
|
|
2003
|
2.94
|
|
2004
|
3.18
|
|
2005
|
3.43
|
|
2006
|
3.70
|
|
2007
|
4.00
|
The current interest rate on new debt is 8%. The firm's corporate tax rate is 40%. The firm's market value capital structure, considered to be optimal, is as follows:
|
Debt
|
Rs.3,000,000
|
|
Common equity
|
7,000,000
|
|
|
|
|
|
|
Total Capital
|
|
Rs.10,000,000
|
|
|
|
|
|
Required:
Calculate the firm's after tax cost of new debt and of common equity, assuming that new equity comes only from reinvested cash flow.( calculate the cost of equity, assuming constant growth model)
Find the firm's WACC, assuming no new common stock is sold.