Cost of Capital. Northwest Bankshares, Inc., is a rapidly growing chain of commercial banks in north central states. A security analyst's report issued by a national brokerage firm indicates that debt yielding 15%, comprises 25% of Northwest's overall capital structure. Furthermore, both earnings and dividends are expected to grow at a rate of 25% per year.
Currently, common stock in the company is priced at $25, and is not expected to pay dividends during the coming year. This yield compares favorably with the 10% return currently available on risk-free securities and the 16% average for all common stocks, given the company's estimated beta of 2.5.
A. Calculate Northwest's component cost of equity using both the capital asset pricing model and the dividend yield plus expected growth model.
B. Assuming a 40% marginal federal plus state income tax rate, calculate Northwest's weighted average cost of capital.

Question

Quizplus · Accepted Answer

The Answer of Cost of Capital. Northwest Bankshares, Inc., is a rapidly growing chain of commercial banks in north central states. A security analyst's report issued by a national brokerage firm indicates that debt yielding 15%, comprises 25% of Northwest's overall capital structure. Furthermore, both earnings and dividends are expected to grow at a rate of 25% per year.
Currently, common stock in the company is priced at $25, and is not expected to pay dividends during the coming year. This yield compares favorably with the 10% return currently available on risk-free securities and the 16% average for all common stocks, given the company's estimated beta of 2.5.
A. Calculate Northwest's component cost of equity using both the capital asset pricing model and the dividend yield plus expected growth model.
B. Assuming a 40% marginal federal plus state income tax rate, calculate Northwest's weighted average cost of capital.