The Allied Group intends to expand the company’s operation by making significant investments in several opportunities available to the group. Accordingly, the group has identified a need for additional financing in preferred and new common stock and new bond issues.
The company has been advised that new bonds can be sold on the market
at par ($1000) with an annual coupon of 8%, for 30 years.
New Common Stock
Market analysis has determined that given the positive history of the firm,
new common stock can be sold at $29 per share, with the last dividend being
paid of $2.25 per share. The growth rate on any new common stock has
been estimated at a constant rate of 15% per year for the next 3 years.
New Preferred Stock can be issued with an annual dividend of 10% of par
and is paid annually and currently would sell for $90 per share.
Questions: Address all of the following questions in a brief but thorough manner.
- What is the after tax cost of new common stock, assuming constant growth in each of the next 3 years?
- What would the dividend yield in each of the first three years if the growth rate is 12%?
- What is the after tax component cost of new debt today?
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