Corporate Finance Q77
| Before-tax cost of new debt | 10 percent |
| Tax rate | 35 percent |
| D/E | 0.6660 |
| Stock price | $30 |
| Next year’s dividend | $2.50 |
| Estimated growth rate | 6.5 percent |
Using the dividend discount model, the company’s WACC is closest to:
- Option : A
- Explanation : Cost of equity = (D1 / P0 ) + g = ($2.50 / $30) + 0.065 = 8.3% + 6.5% = 14.8% Wd = (D/E) / (D/E + 1)= 0.6660 / 1.6660 = 0.40 WACC = [(0.40) (0.10) (1 - 0.35)] + [(0.60) (0.148)] = 11.5%
