Purchase Solution

WACC / beta / required return

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The JBH Corp expects to pay a dividend next year of \$2.22. It expects its cash dividends to grow 5% per year forever. JBH has a debt ratio of L = 35%. Its borrowing rate is rd =9%. JBH pays corporate taxes at the rate of 30%, rf = 6%, rm = 12%, and JBH's common stock is currently selling for \$20 per share. Answer the below quesitons.
1) what is the current (leveraged) required return, re, on JBH's common stock?
2) What is JBH's WACC?
3) What is JBH's unleveraged required return, r?
4) What unleveraged beta is implied by r?
5) What would you say about the estimates in parts (1) thru (4) if you learned that the market model estimated a (leveraged) beta of 2.2 for JBH's common stock?

Solution Summary

The solution explains how to calculate the WACC, beta and the required return

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1) what is the current (leveraged) required return, re, on JBH's common stock?

The leveraged required return re can be calculated using the constant growth model since the dividends are growing at a constant rate of 5%. Using the constant growth model
re = D1/P0 + g where
D1 = expected dividend = 2.22
P0= current price = \$20
g = growth rate = 5%
re = 2.22/20+5% = 16.1%

2) What is JBH's WACC?

WACC = Proportion of debt X after tax cost of ...

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