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?