S Corp
Subject:FinancePrice:2.86 Bought11
S Corp. is expected to pay a $2.55 dividend at year end, the dividend is expected to grow at a constant rate of 4.50% a year, and the common stock currently sells for $35 a share. The before-tax cost of debt is 5.50%, and the tax rate is 40%. The target capital structure consists of 55% debt and 45% common equity. What is the company’s WACC? Do not round your intermediate calculations.
| a. |
7.97% |
|
| b. |
9.24% |
|
| c. |
6.69% |
|
| d. |
8.39% |
|
| e. |
7.12% |
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Option e = 7.12%
Cost of Equity = (2.55 / 35) + 4.5%
= 11.786%
WACC = {Portion of Equity * Cost of Equity} + {Portion of Debt * Cost of Debt (1-tax)}
= {0.45 * 0.11786} + {0.55 * 0.055 (1-0.4)}
= 0.05304 + 0.01815
= 0.071187
Or
= 7.12 %
