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assume the total market value of Firm A consists of the following securities: Common stock:...

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Finance

assume the total market value of Firm A consists of the following securities: Common stock: Price=$48, div(t=0)=$2.25, g=3%.

100m shares outstanding

Preferred stock: Price=$80, perpetual annual dividend=$6.50.

2.5m shares outstanding

Bonds: Price=$1000, YTM=7% (semiannual coupons), Par=$1000, 13 years until maturity.

5m bonds outstanding

1. Use the DCF approach to calculate the cost of common equity. Ignore flotation costs.

2. Express your answer as a percentage. Enter "12.43" for 12.43%. Round to two decimal places if necessary.

3. Calculate the component cost of preferred stock. Ignore flotation costs.

Assuming a tax rate of 40%, calculate the after-tax component cost of debt.

4. Calculate Firm As WACC. Assume the firm is currently operating at its target capital structure (in this case, market weights = target weights).

5. Assume Firm Bs FCFs are as follows: Year 1: $120m, Year 2: $200m, and g=4% after Year 2. WACC=7%. Use the Corporate Valuation Model to calculate Firm Bs total market value. Ignore flotation costs.

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