Problem 10-8 Cost of Common Equity and WACC Patton Paints Corporation has a targ

Question

Problem 10-8
Cost of Common Equity and WACC

Patton Paints Corporation has a target capital structure of 40% debt and 60% common equity, with no preferred stock. Its before-tax cost of debt is 9% and its marginal tax rate is 40%. The current stock price is P0 = $31.50. The last dividend was D0 = $3.00, and it is expected to grow at a 4% constant rate. What is its cost of common equity and its WACC? Round your answers to two decimal places.

rs = %

WACC = %

Problem 10-8
Cost of Common Equity and WACC

Patton Paints Corporation has a target capital structure of 40% debt and 60% common equity, with no preferred stock. Its before-tax cost of debt is 9% and its marginal tax rate is 40%. The current stock price is P0 = $31.50. The last dividend was D0 = $3.00, and it is expected to grow at a 4% constant rate. What is its cost of common equity and its WACC? Round your answers to two decimal places.

rs = %

WACC = %

Explanation / Answer

Cost of Equity = [D0 (1+g) / P0 ] + g

= [ 3(1.04) / 31.5 ] + 0.04

= 13.90%

Cost of Debt = 9 (1-0.40)

= 5.4%

WACC = [13.90*0.6] + [5.4*0.4]

= 10.5%

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