A company’s capital structure consists solely of debt and common equity. It can issue debt at 15 percent interest rate, and its common stock is expected to pay a $5 dividend per share next year. The stock’s price is currently $40, its dividend is expected to grow at a constant rate of 3 percent per year; its tax rate is 30 percent and its weighted average cost of capital (WACC) is 14 percent. 1. Calculate the after-tax cost of debt and the cost of common equity. 2. What percentage of the company’s capital structure consists of common equity?
A company’s capital structure consists solely of debt and common equity. It can issue debt at 15 percent interest rate, and its common stock is expected to pay a $5 dividend per share next year. The stock’s price is currently $40, its dividend is expected to grow at a constant rate of 3 percent per year; its tax rate is 30 percent and its weighted average cost of capital (WACC) is 14 percent. 1. Calculate the after-tax cost of debt and the cost of common equity. 2. What percentage of the company’s capital structure consists of common equity?
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter8: Basic Stock Valuation
Section: Chapter Questions
Problem 15MC: Assume that Temp Force has a beta coefficient of 1.2, that the risk-free rate (the yield on T-bonds)...
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A company’s capital structure consists solely of debt and common equity. It can issue debt at 15 percent interest rate, and its common stock is expected to pay a $5 dividend per share next year. The stock’s price is currently $40, its dividend is expected to grow at a constant rate of 3 percent per year; its tax rate is 30 percent and its weighted average cost of capital (WACC) is 14 percent.
1. Calculate the after-tax cost of debt and the cost of common equity.
2. What percentage of the company’s capital structure consists of common equity?
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