Given an optimal capital structure that is 50% debt and 50% common stock, calculate the weighted average cost of capital for the company given the following additional information:
$\begin{array}{lc}
\text { Bond coupon rate } & 8 \% \
\text { Bond yield to maturity } & 5 \% \
\text { Dividend, expected } & \$ 5 \
\text { Price, common } & \$ 80 \
\text { Growth rate } & 5 \% \
\text { Corporate tax rate } & 21 \%
\end{array}$
A) Less than 6%.
B) More than 6% and less than 7%.
C) More than 7% and less than 8%.
D) More than 8%.

Question

Quizplus · Accepted Answer

The cost of debt is 5%*(1-0.21) = 3.95%. The cost of equity is calculated using the dividend discount model: (5/80) + 0.05 = 11.25%. The WACC is 0.5*3.95% + 0.5*11.25% = 7.6%.

Given an Optimal Capital Structure That Is 50% Debt and 50