Question

Cost of Common Equity and WACC Palencia Paints Corporation has a target capital structure of 25%...

Cost of Common Equity and WACC

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 13% and its marginal tax rate is 40%. The current stock price is P0 = $21.50. The last dividend was D0 = $2.75, and it is expected to grow at a 5% constant rate. What is its cost of common equity and its WACC? Round your answers to two decimal places. Do not round your intermediate calculations.

rs = _______%

WACC = _________ %

Cost of Equity with and without Flotation

Jarett & Sons's common stock currently trades at $26.00 a share. It is expected to pay an annual dividend of $3.00 a share at the end of the year (D1 = $3.00), and the constant growth rate is 5% a year.

What is the company's cost of common equity if all of its equity comes from retained earnings? Round your answer to two decimal places. Do not round your intermediate calculations.
________%

If the company issued new stock, it would incur a 11% flotation cost. What would be the cost of equity from new stock? Round your answer to two decimal places. Do not round your intermediate calculations.
_________ %

Homework Answers

Answer #1

Cost of Common Equity and WACC:

Given, last dividend= $2.75

Dividend growth rate= 5%

Stock price= $21.50

So, 21.50 = 2.75*1.05/(rs-0.05), where r is the cost of common equity

rs = 18.43%

After tax cost of debt= (1-0.40)*13= 7.8%

So, WACC= 0.25*7.8 + 0.75*18.43 = 15.77%

Cost of Equity with and without Flotation:

Stock Price= $26

Dividend next year= $3

Growth rate= 5%

So, 26= 3/(rs-0.05), where rs is cost of common equity without floatation cost

rs= 16.54 %

Floatation cost=11%

So, 26*(1-0.11) = 3/(rs'-0.05), where rs' is cost of common equity with floatation cost

rs'= 17.96%

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
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...
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...
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...
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 9%, and its marginal tax rate is 25%. The current stock price is P0 = $21.50. 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 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...
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...
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 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 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...