Company cost of common equity if it uses retained earnings

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Reference no: EM131548070

Patterns Corporation has a target capital structure of 35 percent debt and 65 percent common equity, with no preferred stock. Currently, before-tax yield to maturity of its bonds (i.e. before-tax cost of debt) is7 percent, and its marginal tax rate is 35%. The current stock price is Po=$25, the last dividend was 0.85, and it is expected to grow at a constant rate of 3 percent.

a) What is the company’s cost of common equity if it uses retained earnings?

b) What is its WACC? (the company does not use preferred stock as a source of borrowed funds)

Reference no: EM131548070

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