Chatham Craft's capital structure consists of $30 million of debt and $90 million of equity. The company's CFO has provided the following data: interest rate on debt is 8%; the company's tax bracket is 30%; the current stock dividend is $2.00; the expected dividend growth rate is 8%; and the current stock price is $40.
After submitting all your work, including formulas and calculations, answer the following questions.
1. What is Chatham's after-tax cost of debt?
2. What is Chatham's cost of equity?
3. What are the weightings of debt and equity?
4. What is the WACC?
5. If the proportion (weighting) of equity in Chatham's capital structure were to increase and the proportion of debt were to decrease, what would happen to the company's WACC? Briefly explain why.
This solution includes an Excel file that explains how to solve various problems related to a hypothetical company's finances, including: its after-tax cost of debt, its cost of equity, the weightings of debt and equity, an explanation of the WACC, and an explanation of what would happen to the WACC if changes occurred in the company's equity and debt.