I need help with part B. Hint: answer is not 5.54% WACC and Cost of Common Equit

Question

I need help with part B. Hint: answer is not 5.54%

WACC and Cost of Common Equity Kahn Inc. has a target capital structure of 65% common equity and 35% debt to fund its $10 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 16%, a before-tax cost of debt of 8%, 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 $4 and the current stock price is $29. What is the company's expected growth rate? Round your answer to two decimal places at the end of the calculations. 0%. If the firm's net income is expected to be $1.2 billion, what portion of its net income is the firm expected to pay out as dividends? ( 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

Return on equity = Net Income / equity

= $1.2 billion / $6.5 billion

= 18.4615%

Growth Rate = (1-payout ratio) * ROE

0.0824 = (1- payout ratio) * 0.1846

0.4464 = 1- payout ratio

payout ratio = 0.5536

Therefore, 55.36 % of net income is expected to be paid as dividend.

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