WACC AND COST OF COMMON EQUITY Kahn Inc. has a target capital structure of 40% c

Question

WACC AND COST OF COMMON EQUITY Kahn Inc. has a target capital structure of 40% common equity and 60% debt to fund its $11 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 13%, a before-tax cost of debt of 12%, 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 $2, and the current stock price is $25 a. What is the company's expected growth rate? Round your answer to two decimal places at the end of the calculations. Do not round your intermediate calculations. b. If the firm's net income is expected to be $1.8 billion, what portion of its net income is the firm expected to pay out as dividends? (Hint: Refer to Equation below.) Growth rate = (1-Payout ratio)ROE Round your answer to two decimal places at the end of the calculations. Do not round your intermediate calculations.

Explanation / Answer

Cost of equity = 13%, D1 = 2 annd P = 25

G = Cost of equity - D1 / P = 13% - 2/25 = 5%

Growth rate = Retention Ratio * ROE

ROE = 1.8 / 11 = 16.36%

Retentio ratio = 5% / 16.36% = 31%

Dividend payout ratio = 1 - 31% = 69%

Dividend paid = 1.8 * 69% = 1.24 Billion

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