Question

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 intermediate calculations.

  1. rs =  %

  2. WACC =  %

Homework Answers

Answer #1

a

As per DDM
Price = recent dividend* (1 + growth rate )/(cost of equity - growth rate)
23.5 = 3.25 * (1+0.08) / (Cost of equity - 0.08)
Cost of equity% = 22.94

b

After tax cost of debt = cost of debt*(1-tax rate)
After tax cost of debt = 8*(1-0.4)
= 4.8
Weight of equity = 1-D/A
Weight of equity = 1-0.35
W(E)=0.65
Weight of debt = D/A
Weight of debt = 0.35
W(D)=0.35
WACC=after tax cost of debt*W(D)+cost of equity*W(E)
WACC=4.8*0.35+22.94*0.65
WACC% = 16.59
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