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Daves Inc. recently hired you as a consultant to estimate the companys WACC. You have...

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Accounting

  1. Daves Inc. recently hired you as a consultant to estimate the companys WACC. You have obtained the following information. (1) The firm has issued 1,000 bonds with a current price of $1,000 per bond and a yield to maturity of 8%. (2) The companys tax rate is 40%. (3) The firm has issued 4 million shares of common stock, and the current price per share is $1. (4) The stock is expected to pay a dividend of $0.10 per share starting at the next year, and the dividend will be growing at 2% each year.

  1. Please calculate the value of the firms debt (from the bond) and the value of the firms equity (from the stock) (3 points).

  1. If you use the Discounted Cash Flow (DCF) model to estimate the cost of equity, what is the cost of equity? (3 points) If the floatation cost of issuing the equity is 7%, what is the cost of equity after floatation (extra credit 2 points)

  1. What is the firms weighted average cost of capital (WACC)? (4 points, show all your work to get full credit)

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