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Homework answers / question archive / Polycorp has a debt equity ratio of 0
WACC = ke x E/V + kd x (1-t) x D/V
Provide an answer as a decimal accurate to two decimal places eg 60.156% should be entered as .60
2.What is the cost of capital for bank overdraft (kbo). The overdraft rate is 6.5 % pa compounded 12 times a year? Answer as a percentage to two decimal places (2.12% should be entered as 2.14). Do not enter the % sign.
3.XYZ Corporation has just paid a dividend of 53 cents per share. The current market price of the share is $15 and shareholders require a return of 10 % pa. What is the annual growth rate (g) of the dividends? Answer as a percentage accurate to two decimal places. Do not enter the % sign.
1.Computation of Correct Debt Ratio D/V that should be used in the WACC formula:
Given,
Debt Equity Ratio = 0.62
=0.62/1
V (Total Assets) = Debt+Equity = 0.62+1 = 1.62
Debt Ratio D/V = 0.62/1.62 = 0.3827 or 0.38
2.Computation of Cost of Capital for Bank Overdraft (kbo):
Cost of Capital for Bank Overdraft = (1 + Stated Rate/Compounding period)^Compounding period - 1
= (1 +6.5%/12)^12 - 1
= 1.067 - 1
Cost of Capital for Bank Overdraft = 0.067 or 6.70%
3.Computation of Annual Growth Rate(g):
Current Market Price = (D0 * (1 + g)) / (Ke - g)
Here,
Current Market Price = $15
Dividend paid (D0) = $0.53
Required rate of return (Ke) = 10%
Expected growth rate (g) = ?
Hence,
$15 = ($0.53 * (1 + g)) / (10% - g)
15 * (10% - g) = 0.53 * (1 + g)
1.5 - 15g = 0.53 + 0.53g
1.5 - 0.53 = 0.53g + 15g
0.97 = 15.53g
g = 0.97 / 15.53
g = 6.25%
So, Annual Growth Rate (g) is 6.25%.
