Granite Works maintains a debt-equity ratio of 0.65 and has a tax rate of 32 percent.The firm does not issue preferred stock.The pre-tax cost of debt is 9.8 percent.There are 25,000 shares of stock outstanding with a beta of 1.2 and a market price of $19 a share.The current market risk premium is 8.5 percent and the current risk-free rate is 3.6 percent.This year,the firm paid an annual dividend of $1.10 a share and expects to increase that amount by 2 percent each year.Using an average expected cost of equity,what is the weighted average cost of capital?

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Quizplus · Accepted Answer

R_e = 0.036 + 1.2(0.085) = 0.138R_e = [($1.10 × 1.02)/$19] + 0.02 = 0.0790526R_{e Average} = (0.138 + 0.0790526)/2 = 0.108526WACC = (1/1.65) (0.108526) + (0.65/1.65) (0.098) (1 - 0.32) = 9.20 percent

Granite Works Maintains a Debt-Equity Ratio of 0