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Capital Structure and Equity with Taxes

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Columbia Gas Company's (CG) current capital structure is 35% debt and 65% equity. This year the company has earnings after tax of $5.1 million and is paying $1.6 million in dividends. To finance a transmission pipe line, CG can borrow $2 million at a cost of 10%, the same rate that CG is currently paying on a total of $15 million long-term debt. CG has 1,000,000 shares outstanding and and its current market price is $31. If CG's long term growth rate of dividends is expected to be 8% what is the weighted cost of capital for the firm? Assume a marginal tax rate of 40%

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Solution Summary

This solution contains step-by-step calculations to determine the Weighted Average Cost of Capital (WACC) using the cost equity, cost of debt, current stock price and tax rate. All formulas and workings are shown enclosed in an Excel file.

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Current stock price 31
Proportion of ...

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