A stock has just paid a $6 of dividend. The dividend is expected to grow at a co

Question

A stock has just paid a $6 of dividend. The dividend is expected to grow at a constant rate of 7% a year, and the common stock current sells for $57. The before-tax cost of debt is 9% ad the tax rate is 50%. The target capital structure cosists of 23% debt and 77% common equity. What is the company WACC if all the equity used is retained earnings? A stock has just paid a $6 of dividend. The dividend is expected to grow at a constant rate of 7% a year, and the common stock current sells for $57. The before-tax cost of debt is 9% ad the tax rate is 50%. The target capital structure cosists of 23% debt and 77% common equity. What is the company WACC if all the equity used is retained earnings?

Explanation / Answer

Cost of equity=(Dividend for next period/Current price)+Growth rate

=(6*1.07).57+0.07

=0.182631578

Cost of debt after tax=9(1-0.5)=0.045

Hence WACC=Respective costs*Respective investment weights

=(0.182631578*0.77)+(0.045*0.23)

=15.09%(Approx).

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