Question

In: Finance

Abacus Inc. issues common stock that is expected to pay a dividend $2.5 next year at...

Abacus Inc. issues common stock that is expected to pay a dividend $2.5 next year at a current price of $25 per share. If its expected dividend growth is 4%, what is Abacus's WACC, given it is financed by 20% debt with after-tax cost of debt 3.5% and the rest is financed with common equity? Tax rate is 35%.
  • A.

    13.5%

  • B.

    11.9%

  • C.

    11.5%

  • D.

    12.2%

  • E.

    14%

Solutions

Expert Solution

Cost of equity=(D1/Current price)+Growth rate

=(2.5/25)+0.04

=14%

Rest with equity=(100-20)=80%

WACC=Respective cost*Respective weight

=(0.8*14)+(0.2*3.5)

=11.9%

jeff jeffy answered 1 year ago
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