Question 8 ots Sorensen Systems Inc. is expected to pay a dividend of $2.80 at y

Question

Question 8 ots Sorensen Systems Inc. is expected to pay a dividend of $2.80 at year nd (DI), the dividend is expected to growa constant rate of 5.50% a year, and the common stock currently sells for $37.50 a share. The before-ta cost of debt is 7.50% and the tax rate is 40%. The target capital stron consists of 45% debt and 55% common equity, what is the company's WACC if all the equity used is from retained earnings? Your answer should be between 7.36 and 12.57,rounded to 2 deci places, with no special characters. Proctorio is sharing your screen

Explanation / Answer

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

=(2.8/37.5)+0.055

=12.967%(Approx)

Cost of debt after tax=7.5(1-0.4)=4.5%

WACC=Respective costs*Respective weights

=(12.967*0.55)+(4.5*0.45)

=9.16%(Approx)

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