Question

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 = %

Answer #1

cost of common equity = 2.50*1.08/30 + 8%

cost of common equity = 17.00%

Amount | weight | cost | weight*cost | |

equity | 65.00 | 0.6500 | 17.0000% | 0.1105 |

debt | 35.00 | 0.3500 | 6.0000% | 0.0210 |

WACC = 13.15%

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