Question

10. Endof-Chapter Problems - The Cost of Capital Q Search this course < Back to Assignment Attempts: 0 8. Problem 10.08 Keep the Highest: 12 Click here to read the eBook: Basic Definitions Click here to read the eBook: The Cost of Retained Earnings, is COST OF COMMON EQUITY AND WACC Palencia Paints Corporation has a target capital structure of 25% debt and 75% common equity, with no preferred stock. Its before-tax cost of 13%, and its marginal tax rate is 40%. The current stock price is pp - $35.00. The last dividend was Do = $2.25, and it is expected to grow at constant rate. What is its cost of common equity and its WACC? Round your answers to two decimal places. Do not round your intermediate calculations a. Is = b. WACC - Grade it Now Save & Conte Continue without saving

Answer 1

a. The cost of common equity is computed by using the below formula:

= Next dividend / P0 + growth rate

= ( $ 2.25 x 1.06 ) / $ 35 + 0.06

= $ 12.81% Approximately.

b. The WACC is computed as follows:

Cost of debt x ( 1 - tax rate ) x weight of debt + cost of equity x weight of equity

= 0.13 x ( 1 - 0.40 ) x 0.25 + 0.1281 x 0.75

= 11.56% Approximately

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