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 (Krf) risk-free rate
for the company is 7%, and the appropriate tax rate is 40%. Also, the beta
coefficient for the company is 1.3 and the market risk premium (Km) is 12%.
New Debt (Kd)
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 delete
the words highlighted in yellow common stock has been estimated at a constant
rate of 15% per year for the next 3 years.
Preferred Stock
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.
Tasks:
Using the Capital Asset Pricing Model (CAPM), discuss and
calculate the cost of new common stock (Ks).
What would the dividend yield as a percentage (i.e., per
dividend payment divided by the book value of a share of stock) today and a
year from now if the dividend growth rate is 12%?
What is the after-tax cost as a percentage (e.g., interest
rate) of new debt today?
What are your recommendations for raising capital based on
your answers to the above questions plus considering other factors (e.g.,
current and potential changes in the economy locally, regionally, nationally
and worldwide, changes in the demand and/or supply plus cost of materials,
skilled labor, management and/or leadership, changes in interest, tax,
inflation and/or supply of investment capital)?
Submission Details:
Submit your 3 to 4 page paper in Microsoft Word, using APA
style.
Name your paper: MBA5009_W4_ LastName_FirstInitial.doc.
Submit to the Submissions Area by the due date assigned.
