a)
WACC = 14%
Cost of debt, kd = 8%
Weight of debt, Wd = 0.45
Weight of equity, We = 0.55
So Cost of Equity, ke = ?
14% = 8% * 0.45* (1-25%) + ke * 0.55
11.3% = Ke * 0.55
ke = 20.54%
Now, Price of equity = $ 31
31 = 2*(1+g)/(20.54% - g)
6.37 - 31g = 2 + 2g
33g = 4.37
g = 13.23%
b)
ROE = Net Income/ Equity
Equity = 55% * 8 B = 4.4 B
ROE = 1/4.4 = 22.72%
13.23% = (1- payout)* ROE
1- payout = 0.58212
payout ratio = 41.78%
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