Palencia Paints Corporation has a target capital structure of 35% debt and 65% common equity, with no preferred stock. Its before-tax cost of debt is 9% and its marginal tax rate is 40%. The current stock price is P0 = $34.00. The last dividend was D0 = $3.75, and it is expected to grow at a 6% 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. rs = % WACC = %
Current price=(Recent dividend)*(1+growth rate)/(Cost of
equity-Growth rate)
=>P0=(D0)*(1+growth rate)/(Cost of equity-Growth rate)
34=(3.75)*(1+6%)/(Cost of equity-6%)
(Cost of equity-6%)=(3.75)*(1+6%)/34
(Cost of equity-6%)=3.975/34
Cost of equity (rs) =3.975/34 +6%=0.176911765 or 17.69%
(Rounded to two decimal places)
WACC=(Weight of equity)*(Cost of equity)+(Weight of debt)*(Pre tax
cost of debt)*(1-Tax rate)
WACC=(65%)*(0.176911765)+(35%)*(9%)*(1-40%)
=0.114992647+0.0189
WACC=0.13389 or 13.39% (Rounded to two decimal
places)
Palencia Paints Corporation has a target capital structure of 35% debt and 65% common equity, with...
Palencia Paints Corporation has a target capital structure of
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Do not round intermediate calculations. Round your answers to two
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