WACC = wd(rd)(1 – T) + (1-wd)(rs)
Above weighted average cost of capital is used to calculate
WACC= 16%
T= tax rate = 25%
Rd= return from debt capital= 10%
rs= return from the equity capital
rs= D1/P0+g
g=8%
D1= next year dividend = current dividend × (1+growth rate)
D1= 2.75(1+8%)= 2.97
P0= 24
rs=2.97/24 + 8%= 20.38 %
16%= wd(10%) (1-0.25) + (1-wd) (20.38%)
0.16= 0.075wd + 0.2038 - 0.2038wd
-0.0438= - 0.1288wd
wd= - 0.0438/ - 0.1288
wd= 34.0062 % or 34%
Wd= 34% is correct answer.
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