Question

Palencia Paints Corporation has a target capital structure of 40% debt and 60% common equity, with no preferred stock. Its before-tax cost of debt is 12%, and its marginal tax rate is 40%. The current stock price is Po - $30.50. The last dividend was Do - $4.00, and it is expected to grow at a 4% constant rate. What is its cost of common equity and its WACC? Do not round intermediate calculations. Round your answers to two decimal places. b. WACC -

Answer 1

a) The cost of equity is calculated as follows:

Do X (1+g) Price = r-9 4x (1 + 0.04) 30.50 =- r -0.04 T = 17.6%

So r or the cost of equity = 17.6%

b)

W ACC = Equity% xr + Debt% x cost of debt x (1 – tax rate) W ACC = 60% x 17.6+ 40% x 12 x (1 – 0.40) W ACC = 13.44%