A firm uses 55% equity and 45% debt for all of its financing needs. Shares of the common stock sell at $43. The company expects to pay $1.30 in dividends next year and increase that amount by 3% annually. The bonds have a 7% coupon rate and a yield-to-maturity of 6.8%. The company has a beta of 1.39 and a 34% marginal tax rate. What is the WACC?

Question

Quizplus · Accepted Answer

The correct answer is A because the WACC is 5.33%. The calculation is as follows:Ke = (D1 / P0) + g = (1.30 / 43) + 0.03 = 0.0605Kd = (C / P) * (1 - T) = (0.07 / 100) * (1 - 0.34) = 0.0459WACC = (E / V) * Ke + (D / V) * Kd = (0.55 * 0.0605) + (0.45 * 0.0459) = 0.0533 or 5.33%

A Firm Uses 55% Equity and 45% Debt for All