Question

Palencia Paints Corporation has a target capital structure of 35% debt and 65% common equity, with...

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 = $33.50. The last dividend was D0 = $3.50, and it is expected to grow at a 4% constant rate. What is its cost of common equity and its WACC? Do not round intermediate calculations. Round your answers to two decimal places.

  1. rs =   %

  2. WACC =  

Homework Answers

Answer #1

For a dividend growth model firm

Price today(p0) =divendend for next year /(cost of equity - growth rate)

Where dividend for next year = dividend for current year *(1+growth rate)

Given p0=33.5

Current year dividend = 3.50

Hence

33.50=3.50*(1+4%)/(cost of equity - 4%)

Cost of equity - 4%=3.64/33.50

Cost of equity =0.108656+0.04

=0.148656

=14.8656% or 14.87%

Hence cost of equity =14.87%

Given pre tax cost of debt = 8%

Hence post tax cost of debt =8%*(1-tax rate)

=8%*(1-40%)

=4.8%

We know that WACC= weight of debt * post tax cost of debt+ weight of equity * cost of equity

=35%*4.8%+14.8656%*65%

= 1.68%+9.66264%

=11.34264% or 11.34%

Hence wacc =11.34%

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Palencia Paints Corporation has a target capital structure of 35% debt and 65% common equity, with...
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 = $23.50. The last dividend was D0 = $3.25, and it is expected to grow at a 8% constant rate. What is its cost of common equity and its WACC? Round your answers to two decimal places. Do not round your...
Palencia Paints Corporation has a target capital structure of 35% debt and 65% common equity, with...
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 9% and its marginal tax rate is 40%. The current stock price is P0 = $28.50. The last dividend was D0 = $2.75, and it is expected to grow at a 6% constant rate. What is its cost of common equity and its WACC? Round your answers to two decimal places. Do not round your...
Palencia Paints Corporation has a target capital structure of 35% debt and 65% common equity, with...
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 = $34.50. The last dividend was D0 = $3.00, and it is expected to grow at a 6% constant rate. What is its cost of common equity and its WACC? Round your answers to two decimal places. Do not round your...
8. COST OF COMMON EQUITY AND WACC Palencia Paints Corporation has a target capital structure of...
8. 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 P0 = $22.50. The last dividend was D0 = $2.25, and it is expected to grow at a 4% constant rate. What is its cost of common equity and its WACC? Round your answers to...
Patton Paints Corporation has a target capital structure of 35% debt and 65% common equity, with...
Patton 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 10% and its marginal tax rate is 40%. The current stock price is P0 = $30.00. The last dividend was D0 = $2.50, and it is expected to grow at a 8% constant rate. What is its cost of common equity and its WACC? Round your answers to two decimal places. rs = % WACC...
Palencia Paints Corporation has a target capital structure of 45% debt and 55% common equity, with...
Palencia Paints Corporation has a target capital structure of 45% debt and 55% common equity, with no preferred stock. Its before-tax cost of debt is 9%, and its marginal tax rate is 25%. The current stock price is P0 = $21.50. The last dividend was D0 = $2.50, and it is expected to grow at a 4% constant rate. What is the rs? What is its cost of common equity and its WACC?
Palencia Paints Corporation has a target capital structure of 40% debt and 60% common equity, with...
Palencia Paints Corporation has a target capital structure of 40% debt and 60% common equity, with no preferred stock. Its before-tax cost of debt is 13%, and its marginal tax rate is 25%. The current stock price is P0 = $27.00. 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? Do not round intermediate calculations. Round your answers to two decimal...
Palencia Paints Corporation has a target capital structure of 25% debt and 75% common equity, with...
Palencia Paints Corporation has a target capital structure of 25% debt and 75% common equity, with no preferred stock. Its before-tax cost of debt is 10%, and its marginal tax rate is 40%. The current stock price is P0 = $35.00. The last dividend was D0 = $3.00, and it is expected to grow at a 5% constant rate. What is its cost of common equity and its WACC? Do not round intermediate calculations. Round your answers to two decimal...
Palencia Paints Corporation has a target capital structure of 30% debt and 70% common equity, with...
Palencia Paints Corporation has a target capital structure of 30% debt and 70% common equity, with no preferred stock. Its before-tax cost of debt is 12%, and its marginal tax rate is 40%. The current stock price is P0 = $29.50. The last dividend was D0 = $3.00, and it is expected to grow at a 8% constant rate. What is its cost of common equity and its WACC? Round your answers to two decimal places. Do not round your...
COST OF COMMON EQUITY AND WACC Palencia Paints Corporation has a target capital structure of 45%...
COST OF COMMON EQUITY AND WACC Palencia Paints Corporation has a target capital structure of 45% debt and 55% common equity, with no preferred stock. Its before-tax cost of debt is 10%, and its marginal tax rate is 40%. The current stock price is P0 = $24.00. The last dividend was D0 = $2.75, and it is expected to grow at a 8% constant rate. What is its cost of common equity and its WACC? Round your answers to two...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT