(WACC) Deals inc has a capital structure consisting of 35% common stock an 65% d
ID: 2692969 • Letter: #
Question
(WACC) Deals inc has a capital structure consisting of 35% common stock an 65% debt.A debt issue of 1,000 par value,6.5% bonds that mature in 15 years and pay annual interest rate will sell for $980.Common stock of the firm is currently selling for $30.97 per share and the firm expects to pay a $2.16 dividend next year. Dividendends have grown at the rate of 5.3% per year and are expected to continue to do so for the foreseeable future.what is deal inc cost of capital where the firms tax rate is 30%? Deals inc cost of capital is ___%(round to three decimal places)Explanation / Answer
Debt: 6.5 percent coupon bonds outstanding, $1,000 par value, 15 years to maturity, selling for 980; the bonds make annual payments So COupon = 6.5% Annual. So PMT = 6.5%*1000= 65 nper = 15 yrs PV = 980, FV = 1000 SO Rate Kd = Rate(nper,pmt,pv,fv) = Rate(15,65,-980,1000) =6.72% Using GOrdons Model, we have P0=D1/(Ks-g) So Ks = D1/P0 + g = 2.16/30.97 + 5.3% = 12.27% We have WACC (Ka)= Wd*(Kd)*(1-t) +(We)*(Ke) where Wd= The proportion of the financing taken on by debt=65% We= The proportion of the financing provided by equity=35% Kd =6.72% Ke = 12.27% And WACC (Ka) = Wd*(Kd)*(1-t) +(We)*(Ke) ie wacc = 65%*6.72%*(1-30%) + 35%*12.27% = 7.352%
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