Cost Source Amount $500,000 | 8% compounded annually | $650,000 | 6% payable semiannually $200,000 Stock price: $50/share Loan Bonds Stock Dividend: $X/share Retained Earnings $150,000 WACC .33 (....

Question

Question

Cost Source Amount $500,000 | 8% compounded annually | $650,000 | 6% payable semiannually $200,000 Stock price: $50/share Loa

Answer 1

Answer #1

10a). Tax rate T

Cost of loan = annual interest rate*(1-tax rate)

0.06 = 8%*(1-tax rate)

0.06/0.08 = 1 - tax rate

tax rate = 1 - (0.06/0.08) = 25%

b). No growth rate is given so cost of stock will be dividend/share price

From the WACC equation, cost of stock = 0.12 or 12%

So, 0.12 = X/50

X = 0.12*50 = $6 per share

c). Weights:

Comparing with the WACC equation, Y is the weight of retained earnings which is 0.100 or 10%.

Answer 2