Dahmen plc is financed by 60% debt and 40% equity. Dahmen would like to determine their...

Dahmen plc is financed by 60% debt and 40% equity. Dahmen would like to determine their weighted-average cost of capital (WACC) so this can be used to appraise their potential capital investment projects.

Describe the WACC.

(4 marks, maximum 200 words)

You have been provided with the following information to allow you to determine Dahmen’s WACC

Dahmen’s bond holders have a required yield of 9%
Dahmen’s ordinary shares are currently priced at $40.
The latest dividend of $4 per share has just been paid.
The dividend growth rate over the past few years has been 8% and this is expected to continue for the foreseeable future.
Dahmen’s corporation tax rate is 35%.

Calculate Dahmen’s WACC.

Expert Solution

Answer (a) :

Weighted average cost of capital (WACC) refers to company's overall cost of capital which is calculated on basis the proportionate weights of each source of capital. All sources of capital including preferred stock, common stock, bonds and other long terms debts are included in WACC calculation. WACC is commonly used as discounting rate for future cash flows analysis. Also, cost of capital is what the company expects to return on its securities to its investors.

Answer (b) : WACC = 11.03 %

Workings:

ekkarill92 answered 2 years ago

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