Sample Problem and SolutionA company is expected to pay a $3 50 dividend at yearend the

Question

Sample Problem and Solution

A company is expected to pay a $3.50 dividend at year-end, the

dividends are expected to grow at a constant rate of 6.50% a year, and the common stock currently sells for $62.50 per share. The before-tax cost of debt is 7.50% and the tax rate is 40.00%. The target capital structure consists of 40.00% debt and 60.00% common equity. What is the company’s WACC if all equity is from retained earnings?

Solution:

Finance