Constant Growth Dividend.
Blackwell Corp.'s stock has a required rate of return, rs, of 10.25%, and it current price, P0, is $57.50 per share. The dividend is expected to grow at a constant rate of 6.0% per year. Show your work in all calculations.
Question 1: Calculate the expected year-end dividend, D1. Hint: Rearrange the Gordon model to solve for D1. Check figure: D1 = $2.44.
Question 2: Calculate the expected year-end dividend at the end of year 3, D3. Hint: If D1 = D0 Ã (1 + g)1 then D3 = ?
Weighted Average Cost of Capital (WACC).
Blue Bayou Inc. is expected to pay a $2.50 dividend at year end (D1 = $2.50), the dividend is expected to grow at a constant rate of 5.5% a year, and the common stock currently sells for $52.50 a share. The before-tax cost of debt is 7.5%, and the tax rate is 40%. The target capital structure consists of 45% debt and 55% common equity. Show your work in all calculations.
Question 1: Calculate the company's after-tax cost of debt to be used in determining the WACC. Question 2: Calculate the company's cost of retained earnings to be used in determining the WACC. Check figure: rs = 10.26%. Question 3: Calculate the company's WACC if all the equity used is from retained earnings. Check figure: WACC = 7.67%.
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