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R.S. Green has 250,000 shares of common stock outstanding at a market price of $28 a...

  1. R.S. Green has 250,000 shares of common stock outstanding at a market price of $28 a share. Next year's annual dividend is expected to be $1.55 a share. The dividend growth rate is 2 percent. The firm also has 7,500 bonds outstanding with a face value of $1,000 per bond. The yield to maturity that bonds of this category generally earn is 9.5%. The company's tax rate is 34 percent. What is the firm's weighted average cost of capital?
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Answer #1
Value of equity = 7000000
250000*28
Cost of equity = 7.54%
1.55/28+2%
value of debt = 7500000
7500*1000
Post tax cost of debt = 6.27%
9.5%*(1-34%)
Computation of WACC
i ii iii iv=ii*iii
Source value weight cost WACC
Debt 7500000 51.72% 6.27% 3.24%
Equity 7000000 48.28% 7.54% 3.64%
14500000 6.88%
WACC= 6.88%
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