New Common Stock, New Debt (Kd) and Preferred Stock Discussion

Instructions

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 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.

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)?

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