CE has a capital structure consisting of 36% common stock and 64% debt. A debt i

Question

CE has a capital structure consisting of 36% common stock and 64% debt. A debt issue of $1,000 par value, 6.2% bonds that mature in 15 years and pay annual interest will sell for $977. Common stock of the firm is currently selling for $30.54 per share and the firm expects to pay a $2.34 dividend next year. Dividends have grown at a rate of 4.7% per year and are expected to continue to do so for the foreseeable future. CE's cost of capital is ________% where the firms tax rate is 30% (Round to three decimal places)

Explanation / Answer

Calculation of cost of debt $977 =62/(1+r) +62/(1+r)^2 ...1062/(1+r)^15 r =6.44% Calculation of cost of equity $30.54 =$2.34 /(re-4.7%) re=12.36% WACC =12.36%*36% +64%*(1-30%)*6.44% =7.335%

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