Ask Question
15 August, 15:55

Cost of Common Equity and WACC Palencia Paints Corporation has a target capital structure of 35% debt and 65% common equity, with no preferred stock. Its before-tax cost of debt is 8%, and its marginal tax rate is 40%. The current stock price is. The last dividend was, and it is expected to grow at a 5% constant rate. What is its cost of common equity and its WACC?

+2
Answers (1)
  1. 15 August, 16:13
    0
    Cost of common equity=15.74%

    WACC=11.91%

    Explanation:

    Complete Question:

    Palencia Paints Corporation has a target capital structure of 35% debt and 65% common equity, with no preferred stock. Its before-tax cost of debt is 8%, and its marginal tax rate is 40%. The current stock price is P0=$22.00. The last dividend was D0=$2.25, and it is expected to grow at a 5% constant rate. What is its cost of common equity and its WACC?

    Answer and Explanation:

    First we have to calculate the cost of equity which shall be calculated as follows:

    Cost of equity=D0 (1+g) / P0+g

    In the given question:

    D0=$2.25

    P0=$22.00

    g=growth rate=5%

    Cost of common equity=$2.25 (1+5%) / $22.00+5%

    =15.74%

    Now we will calculate the WACC which shall be determined through following mentioned formula:

    WACC=[Portion of Equity in capital structure*Cost of equity+Portion of Debt in capital structure*Post tax cost of debt]/Portion of Equity in capital structure+Portion of Debt in capital structure

    WACC=[65%*15.74%+35% * (1-40%) * 8%]/100%

    WACC=11.91%
Know the Answer?
Not Sure About the Answer?
Find an answer to your question 👍 “Cost of Common Equity and WACC Palencia Paints Corporation has a target capital structure of 35% debt and 65% common equity, with no ...” in 📗 Business if the answers seem to be not correct or there’s no answer. Try a smart search to find answers to similar questions.
Search for Other Answers