Flaherty Electric has a capital structure that consists of 70 percent equity and 30 percent debt

Accounting Apr 25, 2021

Flaherty Electric has a capital structure that consists of 70 percent equity and 30 percent debt. The company's long-term bonds have a before-tax yield to maturity of 8.4 percent The company uses the DCF approach to determine the cost of equity. Flaherty's common stock currently trades at $40.5 per share. The year-end dividend (Di) is expected to be $2.50 per share, and the dividend is expected to grow forever at a constant rate of 7 percent a year. The company estimates that it will have to issue new common stock to help fund this year's projects. The company's tax rate is 40 percent What is the company's weighted average cost of capital, WACC? a. 10.73% b. 10.30% c. 11.31% d. 7.48%

Expert Solution

Workings:

Computation of Cost of Equity using DCF Approach:

Cost of Equity = Dividend for Next year/Current Stock Price + Growth Rate

= $2.50/$40.5 + 7%

= 6.17%+7%

Cost of Equity = 13.17%

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