PART 1: Adam has been asked to calculate the weighted average cost of capital (WACC) for an important client (TLC Inc

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PART 1:

Adam has been asked to calculate the weighted average cost of capital (WACC) for an important client (TLC Inc.) of the company.

TLC has a Debt-to-Equity Ratio of 50%, and a tax rate of 40%. TLC has 20-year bonds that have been issued 7 years ago. The bonds were originally issued with a 9% Coupon Rate and are presently selling for 108% of face value.

TLC Inc. has a Beta of 0.90 and many people in the investment community are projecting a Market Risk premium of only 7%. The Risk-free rate of interest is presently yielding 8%.

TLC Inc. had just issued a dividend of $1.80 per share and guidance has been provided to the markets that the dividend is expected to grow at 7% for the foreseeable future. After checking the market watch website, we see that share of TLC is trading at $25 per share.

The boss also asks to explain in a paragraph why using WACC is not always appropriate in evaluating projects.

PART 2:

1. What would the price of (TLC Inc.) stock be if the company paid out dividends of $126,000, has an Outstanding float of 100,000 common shares, has a Return on Equity of 25%, and Earnings per share of $4.54?
2. The boss wants you to use the Dividend growth model to calculate the price of (TLC Inc.) stock as well as list the advantages and disadvantages of this model.