Sweet Treats common stock is currently priced at $17.15 a share. The company jus
ID: 2716742 • Letter: S
Question
Sweet Treats common stock is currently priced at $17.15 a share. The company just paid $1.22 per share as its annual dividend. The dividends have been increasing by 2.4 percent annually and are expected to continue doing the same. What is this firm's cost of equity?
9.82 percent
Mullineaux Corporation has a target capital structure of 41 percent common stock, 4 percent preferred stock, and 55 percent debt. Its cost of equity is 18 percent, the cost of preferred stock is 6.5 percent, and the pretax cost of debt is 8.5 percent. What is the firm's WACC given a tax rate of 39 percent?
Sweet Treats common stock is currently priced at $17.15 a share. The company just paid $1.22 per share as its annual dividend. The dividends have been increasing by 2.4 percent annually and are expected to continue doing the same. What is this firm's cost of equity?
Explanation / Answer
1)
Price = recent dividend* ( 1 + growth rate )/( cost of equity - growth rate)
17.15 = 1.22* (1 + .024)/(cost of equity - 0.024)
= 9.68%
2)
WACC
=
E
×
re
+
D
×
(1 t)
×
rd
+
P
×
rp
(E+D+P)
(E+D+P)
(E+D+P)
Where:
E
=
Market value of equity
D
=
Market value of debt
P
=
Market value of preferred stock
re
=
Cost of equity
rd
=
Cost of debt
rp
=
Cost of preferred stock
t
=
Marginal tax rate
= 0.55*8.5*(1 - 0.39) + 0.04*6.5 + 0.41*18 = 10.49%
WACC
=
E
×
re
+
D
×
(1 t)
×
rd
+
P
×
rp
(E+D+P)
(E+D+P)
(E+D+P)
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