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Homework answers / question archive / A company has determined that its optimal capital structure consists of 58 percent debt and the rest is equity

A company has determined that its optimal capital structure consists of 58 percent debt and the rest is equity

Finance

A company has determined that its optimal capital structure consists of 58 percent debt and the rest is equity. Given the following information, calculate the firm's weighted average cost of capital.kd = 7.6 %Tax rate = 34 %P0 = $ 24.85 Growth = 6.3 %D1 = $ 0.72 Show your answer to the nearest .1%

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Computation of Weighted Average Cost of Capital (WACC):
Source of Capital Weight After Tax Cost of Capital Weighted Cost of Capital
Debt 58% 5.016% 2.909%
Equity 42.00% 9.197% 3.863%
    WACC = 6.8%

 

Computation of Weighted Average Cost of Capital (WACC):  
Source of Capital Weight After Tax Cost of Capital Weighted Cost of Capital
Debt 0.58 =7.6%*(1-34%) =58%*5.016%
Equity =1-58% =0.72/24.85+6.3% =42%*9.197%
    WACC = =2.909%+3.863%

 

Cost of Equity = D1/P0 + g

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