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Bobs is a retail chain of specialty hardware stores The firm has 21000 shares of stock outstanding that are currently $63 per share in the market

Bob's is a retail chain of specialty hardware stores. The firm has 21,000 shares of stock outstanding that are currently $63 per share in the market. Firm's Beta is 1.2. The rick.free rate is 1% and the market risk premium is 6%. Firm just paid an annual dividend of $2.80 per share. Dividend is expected to grow indefinitely at 5% annually. The firm also has 500 coupon bonds outstanding that have a face value of $1,000, a market price of $1,068, 6 years left to maturity and have a current YTM of 5.6%. The corporate tax rate is 35% 1) Find cost of debt. 2) Find cost of equity: both CAPM and Dividend Discount/Growth Model can work, but use CAPM here assuming CAPM is a more accurate method for this company. 3) Plug the appropriate return computed by CAPM into the DDM to assess if the current stock is under or over valued? 4) Compare cost of debt and cost of equity you computed, which number is greater, why is it usually the case? 5) Find weight on debt and weight on equity, and eventually firm's WACC.

Feb 08 2020 View more View Less

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