Question

Patton paints has a target capital structure of 60% debt and 40% equity with no preferred stock. It'd before tax cost of debt is 12% and marginal tax rate is 40% . The current stock price is $22.50. The last dividend was $2.00 (Do) and is expected to grow at a constant rate of 7%. What is the cost of common equity and WACC?

Answer 1

cost of common equity = 2*1.07/22.50 + 7% = 16.51%

	Amount	weight	cost	weight*cost
equity	40.00	0.4000	16.5111%	0.0660
debt	60.00	0.6000	7.2000%	0.0432

WACC = 10.92%