a). WACC = [wD * kD * (1 - t)] + [wE * kE]
12% = [0.5 * 8% * (1 - 0.25)] + [0.5 * kE]
12% = 3% + [0.5 * kE]
0.5 * kE = 12% - 3%
kE = 9% / 0.5 = 18%
Growth Rate = kE - [D1/P0]
= 0.18 - [$2/$26]
= 0.18 - 0.0769 = 0.1031, or 10.31%
b). ROE = Net Income / [wE * Total Assets]
= $1,800,000,000 / [0.5 * $8,000,000,000] = 0.45, or 45%
g = ROE * (1 - Payout Ratio)
0.1031 = 0.45 * (1 - Payout Ratio)
1 - Payout Ratio = 0.1031 / 0.45
1 - Payout Ratio = 0.2291
Payout Ratio = 1 - 0.2291 = 0.7709, or 77.09%
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