Question

Gold Diggers, Inc. has $400,000 shares of common stock currently trading at $45/share. The common stock of Gold Diggers, Inc is expected to pay a dividend of $2/share next year, and it has a beta calculated at 0.90. It also has 200,000 shares of preferred stock, trading at $50/share. The preferred stock pays dividends of 6%. Finally, Gold Diggers, Inc has 35,0000 bonds currently trading at $910/bond. The coupon rate is 7.5% and the bonds will mature in 12 years.

Gold Diggers, Inc. expects its dividends to grow at a rate of 7%/year, and it is in a 34% tax bracket. It estimates that the risk free rate of return is 4% and the market rate of return is 12%.

Calculate the WACC for Gold Diggers, Inc. Be sure to show all your work. NOTE: When calculating the cost of equity, compute the cost using the CAPM method and the DCF (Dividend Constant Growth Method) and average the two.

Answer 1

WACC = 7.04 % approx

Note : I have taken upto 4 to 5 decimal

U can solve taking upto decimal if required.