Question

please answer all parts

Palencia Paints Cerporation has a target capial structure of 40% debt and 60% commen equity, with no preferred stock. Its before-tax cost of debt is 12%, and ts marginal tax rate is 25%. The current stock price is Pa- $34.50. The last dividend was De -$3.50, and it is expected te grew at a 7 % constant rate. what is its cost of common equity and its WACC? De not round internmediate calculations. Round your answers to two decimal places WACC

Answer 1

Answer to Question 1:

Expected Dividend in 1 year, D1 = D0 * (1 + g)
Expected Dividend in 1 year, D1 = $3.50 * 1.07
Expected Dividend in 1 year, D1 = $3.745

Cost of Common Equity = D1 / P0 + g
Cost of Common Equity = $3.745 / $34.50 + 0.07
Cost of Common Equity = 0.1786 or 17.86%

WACC = Weight of Debt * Cost of Debt * (1 - Tax) + Weight of Equity * Cost of Common Equity
WACC = 0.40 * 12.00% * *(1 - 0.25) + 0.60 * 17.86%
WACC = 3.60% + 10.72%
WACC = 14.32%

Answer to Question 2:

Expected Dividend in 1 year, D1 = D0 * (1 + g)
Expected Dividend in 1 year, D1 = $3.50 * 1.07
Expected Dividend in 1 year, D1 = $3.745

Cost of Common Equity = D1 / P0 + g
Cost of Common Equity = $3.745 / $33.75 + 0.07
Cost of Common Equity = 0.1810 or 18.10%

Let Weight of Debt be x and Weight of Common Equity be (1 - x)

WACC = Weight of Debt * Cost of Debt * (1 - Tax) + Weight of Equity * Cost of Common Equity
0.1305 = x * 0.1100 * (1 - 0.25) + (1 - x) * 0.1810
0.1305 = x * 0.0825 + 0.1810 - x * 0.1810
x * 0.0985 = 0.0505
x = 0.5127 or 51.27%

So, Weight of Debt = 51.27%