The Trumpet Corporation has a capital structure consisting of 30 percent debt and 70 percent common equity. The financial managers of Trumpet believe that these capital proportions represent the company's target capital structure. If Trumpet were to issue new debt, it expects this debt will yield 8 percent. Currently, Trumpet's stock is trading at $30 per shares, the current dividend is $1 per share, and Trumpet's financial managers believe that this dividend will grow at a rate of 3 percent per year. If Trumpet's weighted average cost of capital is closest to:

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The WACC is calculated using the formula: WACC = (E/V * Re) + (D/V * Rd * (1-T)). Here, E/V = 0.7, D/V = 0.3, Re (cost of equity) is calculated using the Gordon Growth Model: Re = (D1/P0) + g = (1 * 1.03 / 30) + 0.03 = 0.0643 or 6.43%, Rd = 8%, and assuming no taxes (T=0), WACC = (0.7 * 6.43%) + (0.3 * 8%) = 6.063%.

The Trumpet Corporation Has a Capital Structure Consisting of 30