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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. 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%
Expert Solution
| 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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