Find weighted average of cost of capital, calculate after tax cost of new debt and common equity...
Common stock 7.8 million shares outstanding-selling for $65 per share, expected dividend at end of current year is 55% of 7.80 EPS. Expect past trends to continue; g may be based on the growth rate, current interest rate on new debt is 9% firms marginal tax rate is 40%. This is what I came up with, can you help me write in a more formal formula?
Common equity 156,000,000.
Total Liability and Equity 260,000,000.
k=0.55 (10%)(0.6) +0.10 (10.3%) + 0.09 (13.4%)
After tax cost 372,555,910.5 ( I don't understand this figure!) Weighted average cost of capital 591,084
This is a tricky question:
In this case, stock price P = 65
D = 55% * 7.80 = 4.29
net income = 7.8 EPS * 7.8 million share = 60.84 million
common equity = 156 ...
The solution determines the after tax equity and weighted average cost of capital.