In: Finance
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%.
13.5%
11.9%
11.5%
12.2%
14%
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%