Kahn Inc. has a target capital structure of 55% common equity and 45% debt to fu
ID: 2631238 • Letter: K
Question
Kahn Inc. has a target capital structure of 55% common equity and 45% debt to fund its $9 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 15%, a before-tax cost of debt of 11%, and a tax rate of 40%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D1) is $2 and the current stock price is $28.
a.) What is the company's expected growth rate? Round your answer to two decimal places at the end of the calculations. ________ %
b.) If the firm's net income is expected to be $1.8 billion, what portion of its net income is the firm expected to pay out as dividends? (Hint: Refer to Equation below.)
Growth rate = (1 - Payout ratio)ROE Round your answer to two decimal places at the end of the calculations. ________ %
Explanation / Answer
After tax cost of Debt (Kd)= 11*0.60
= 6.6%
Weight of Equity (We) = 0.55
Weight of Debt (Wd) = 0.45
Let Cost of Equity be
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