Calculating WACE
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1. Calculate Company C's weighted average cost of equity, given the following information: (a) D0: $2.50, (b) Current Stock Price: $52.50, (c) Company's Constant Growth Rate: 6%, (d) Debt: $23,000,000, (e) Equity: $20,000,000, and (f) Preferred Stock: $10,000,000.
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Solution Summary
This solution illustrates how to compute a company's weighted-average cost of equity using the Gordon Dividend Growth Model.
Solution Preview
First, we need to find the required rate of return on equity using the Gordon Dividend Growth Model. Therefore,
Current price = Next dividend/(Required rate of return - Growth rate)
Current price = (Last dividend*(1=Growth rate))/(Required rate of return - Growth rate)
$52.50 = ($2.50*(1+.06))/(Required rate of return - .06)
$52.50 = ...
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