The St. Johns Corporation has a capital structure consisting of 40 percent debt and 60 percent common equity. The financial managers of St. Johns believe that these capital proportions represent the company's target capital structure. If St. Johns were to issue new debt, it expects this debt will yield 8 percent. Currently, St. Johns stock is trading at $20 per shares, the current dividend is $1 per share, and St. Johns' financial managers believe that this dividend will grow at a rate of 6 percent per year. If St. John's weighted average cost of capital is closest to:

Question

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) is calculated using the formula: WACC = (E/V) * Re + (D/V) * Rd * (1-Tc). Here, E/V = 60%, D/V = 40%, Re (cost of equity) is calculated using the Gordon Growth Model: Re = (D1/P0) + g = (1 * 1.06 / 20) + 0.06 = 11.3%, Rd (cost of debt) = 8%, and assuming no taxes (Tc = 0), WACC = 0.6 * 11.3% + 0.4 * 8% = 8.86%.

The St Johns Corporation Has a Capital Structure Consisting of 40