a)
WACC = (Weight of debt * cost of debt * (1-tax rate)) + (weight of equity * cost of equity)
13% = (0.55 * 12% * (1 - 0.25)) + (0.45 * cost of equity)
13% = 4.95% + (0.45 * cost of equity)
0.45 * cost of equity = 13% - 4.95%
0.45 * cost of equity = 8.05%
Cost of equity = 8.05% / 0.45 = 17.89%
Price = D1/(Ke - g)
$33 = $3/(0.1789 - g)
$3 = $33 * (0.1789 - g)
$3 = 5.9033 - 33g
33 * g = 5.9033 - 3 = 2.9033
g = 2.9033/33 =
g = 8.80%
Expected growth rate = 8.80%
b)
Growth rate = return on equity × (1- payout ratio)
Payout ratio = 1 - (growth rate / return on equity)
= 1 - (8.80/17.89)
= 50.82%
Payout ratio = 50.82%
Kahn Inc. has a target capital structure of 45% common equity and 55% debt to fund...
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