Question: It is 1 January 2005, and you are interested in finding the cost of equity rE of your company. After a quick search you have found the following data:
• The company currently has 1,600,000 shares outstanding. The current share price is $3.
• The company's earnings for 2004 were $2,000,000. The company policy has just paid out $300,000 in dividends, and it intends to continue this 15% dividend payout from earnings in the future.
• During 2004 the company spent $600,000 on share repurchases. It is the company's intention to increase the amount spent on share repurchases at the same growth rate as the amount spent on dividends.
• Projected earnings growth is 2% per year.
1. You wish to estimate the share's price of ‘softy', your favorite underwear company. You know that tomorrow the company will pay its annual dividend in the amount of 1.5$ per share, a growth in the company's cash dividends of 4% comparing to last year. As an experienced investor, you demand a yield of 12% on your investment in the company. What should be the company's share price?
2. Your boss asked you to find the WACC of ‘Welcome to Paradise' company. After a quick research you have come up with the following data:
• The company has 1,600,000 shares, currently sold for 2$ per share.
• The company's debt is 2,500,000$. The amount of interest paid last year by the company was $300,000.
• The corporate tax rate is 40%.
• The cost of capital requested by the investors is 13%. What is the company's WACC?