WACC) Deals inc has a capital structure consisting of 42% common stock an 54% de

Question

WACC) Deals inc has a capital structure consisting of 42% common stock an 54% debt.A debt issue of 1,000 par value,61% bonds that mature in 15 years and pay annual interest rate will sell for $974.Common stock of the firm is currently selling for $29.71 per share and the firm expects to pay a $2.32 dividend next year. Dividends have grown at the rate of 4.7% 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

Note : Equity & Debt rateio is not addingup to 100%. So I amassuming Debt as 42% & Equity as 58%. Pl use correct ratio in WACC formula to get teh WACC. REst of working is correct & has no impact on D/E Ratio. Debt: 6.1 percent coupon bonds outstanding, $1,000 par value, 15 years to maturity, selling for 974; the bonds make annual payments So COupon = 6.1% Annual. So PMT = 6.1%*1000= 61 nper = 15 yrs PV = 974, FV = 1000 SO Rate Kd = Rate(nper,pmt,pv,fv) = Rate(15,61,-974,1000) =6.374% Using GOrdons Model, we have P0=D1/(Ks-g) So Ks = D1/P0 + g = 2.32/29.71 + 4.7% = 12.509% We have WACC (Ka)= Wd*(Kd)*(1-t) +(We)*(Ke) where Wd= The proportion of the financing taken on by debt=42% We= The proportion of the financing provided by equity=58% Kd =6.374% Ke = 12.509% And WACC (Ka) = Wd*(Kd)*(1-t) +(We)*(Ke) ie wacc = 42%*6.374%*(1-30%) + 58%*12.509% = 9.129%

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