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Calculate the company weighted average cost of capital

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Question 1: Calculate the company's weighted average cost of capital (WACC) under the following assumptions provided by Sue.

  1. The company's long-term bonds (in the new capital structure) currently offer a yield to maturity of 8 percent.
  2. The company's stock price (in the new capital structure) is $90 per share (P0 = $90).
  3. The company will pay a dividend of $4 per share next year (D1 = $4.00).
  4. The dividend is expected to grow at a constant rate of 6 percent a year (g = 6%).
  5. The company's capital structure is 75 percent equity and 25 percent debt.
  6. The company's income tax rate is 40 percent.

Question 2: What is the firm's WACC in this new capital structure? Why do we need to be concerned with the WACC?

Reference no: EM132492399

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