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Polycorp has a debt equity ratio of 0
- Polycorp has a debt equity ratio of 0.62.What is the correct debt ratio D/V that should be used in the WACC formula?
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.
Expert Solution
1). Computation of the debt ratio (D/V):-
Debt-to-equity ratio = 0.62
Debt = 0.62
Equity = 1
V (total assets) = Debt + Equity
= 0.62 + 1
= 1.62
D/V = 0.62 / 1.62
= 0.38
2). Computation of the cost of capital for bank overdraft:-
Cost of capital for bank overdraft = (1 + Stated rate / Compounding period)^Compounding period - 1
= (1 + 6.5% / 12)^12-1
= 1.00542^12 - 1
= 1.0670 - 1
= 6.70
3). Computation of the annual growth rate of dividends:-
Current share price = (D0 * (1 + Growth rate) / (Required return - Growth rate)
$15 = ($0.53 * (1 + Growth rate) / (10% - Growth rate)
$15 * (10% - Growth rate) = $0.53 + ($0.53 * Growth rate)
$1.50 - ($15 * Growth rate) = $0.53 + ($0.53 * Growth rate)
($15 * Growth rate) + ($0.53 * Growth rate) = $1.50 - $0.53
$15.53 * Growth rate = $0.97
Growth rate = $0.97 / $15.53
= 6.25
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