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The target weight for equity is 70% and the the target weight for debt is 30%...

The target weight for equity is 70% and the the target weight for debt is 30% for a company. The company has ten year outstanding bonds that have a yield to maturity of 6.8%. The firm's common stock paid an annual dividend of $1.80 yesterday and the common stock is currently selling for $70. Dividends are expected to grow at a constant rate of 6% and the corporate tax rate is 35%. What is the WACC for this firm? (Enter your answer to 4 decimal places as 0.XXXX)

Solutions

Expert Solution

Required rate of return of equity will be calculated through dividend discounting model

Price of the company=expected dividend/(required rate of return- growth rate)

70= (1.8*106%)/(RR-.06)

Cost of equity= 8.57%

WACC= (cost of equity X weight of equity)+(cost of debt X weight of debt) ( 1 - tax)

= (8.57*.7)+(.3*6.8)(1-.35)

= (6.108+1.326)

= 7.434%

jeff jeffy answered 2 years ago
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