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Story problem: XYZ company has a marginal tax rate is 40 percent. The company can raise debt at a 10.9 percent interest rate. The risk-free rate is 5%, the return on the stock market is 12.5% and the firm has a beta of 1.75. The last dividend paid by Miller was $1.00 and its growth rate expected in earnings and dividends is 6 percent. Mickey plans to finance all capital expenditures with 40 percent debt and 60 percent equity. The stock price is $8.75
1)What is XYZ's overall WACC?
The work I've done so far (I'm having trouble finishing the equation)
I've found the CAPM for this problem to be 18.125% & the DDM approach to be 18.11%. I also will use the formula for WACC to be = Rd
(1- Tc )*( D / V )+ Re *( E / V )
Rd - required return of the firm's debt
1-Tc - the tax adjustment for interest expense
D/V - Debt / total value
Re - firm's cost of equity
E/V - Equity/total value
WACC = 12.5(1- 10.9 )*( 40% / 8.75 )+ Re *( 60% / V )?
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