A company has determined that its optimal capital structure consists of 45 percent debt and the rest is equity

Computation of Weighted Average Cost of Capital (WACC):

First we calculate Share Price using Gordon model:

Share price (P₀) = D1 / k -g

$28.69 = $1.82 / k - 5.7%

$28.69* (k - 5.7%) = $1.82

k - 5.7% = $1.82 / $28.69

k - 0.057 = 0.0634

k = 0.0634 + 0.057

k = 12.04%

So, cost of equity is 12.04%.

Now, we will calculate weighted average cost of capital (WACC) by the following formula:

WACC = w_e * r_e + w_d* r_d * (1 - t)

WACC = ((55% * 12.04%) + (45% * 5.8%) * ( 1 - 28%))

WACC = 6.62% + (2.61% * 72%)

WACC = 6.62% + 1.88% = 8.50%

So, weighted average cost of capital is 8.50%