Purchase Solution

Cost of common equity and WACC

Not what you're looking for?

Ask Custom Question

Patton Paints Corporation has a target capital structure of 40% debt and 60% common equity, with no preferred stock. It's before tax cost of debt is 12%, and it's marginal taz rate is 40%. The current stock price is Po= $22.50. The last dividend was Do=$2.00, and it is expected to grow at a constant rate of 7%. What is the cost of common equity and its WACC?

So far I got:

rd(1-T)= .12(1-.40)=.072

Po= D1/(Ks-g)
D1= Do*(1+g)= $2*(1+7%)=$2.14
Po=$2.14/ (??-7%)

I made it this far but I don't know how to solve for Ks to get the rest of the equation. Then after that I am a little confused as well. I think I would do the following but I'm not sure:

WACC= (.40)(.072)+(.60)(??)=??

Purchase this Solution
Solution Summary

Response provides the steps to compute Cost of common equity and WACC

Solution Preview

Patton Paints Corporation has a target capital structure of 40% debt and 60% common equity, with no preferred stock. It's before tax cost of debt is 12%, and it's marginal taz rate is 40%. The current stock price is Po= $22.50. The last dividend was Do=$2.00, and it is expected to grow at a constant rate of 7%. What is the cost of common equity and ...

Purchase this Solution
Free BrainMass Quizzes
Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

Academic Reading and Writing: Critical Thinking

Importance of Critical Thinking

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

Basics of corporate finance

These questions will test you on your knowledge of finance.

Production and cost theory

Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.

View More Free Quizzes
Related BrainMass Solutions

  • Cost of common equity and WACC

    What is its cost of common equity and its WACC?

  • EPS Growth Rate

    of a detailed explanation and calculation to find EPS Growth rate, cost of retained earnings, cost of new common equity, breakpoint associated with retained earnings, and WACC.

  • Cost of common equity and WACC

    142377 Cost of common equity and WACC.. Midwest Electric Company (MEC) uses only debt and equity.

  • Weighted Average Cost of Capital (WACC)

    225937 Weighted Average Cost of Capital (WACC).. 4. (P10-9) WACC The Patrick Company's cost of common equity is 16 percent, its before-tax cost of debt is 13 percent, and its marginal tax rate is 40 percent. The stock sells at book value.

  • WACC for this company

    Here we need to use the formula for WACC: WACC = (wd)(rd)(1 - T) + (we)(re) + (wp)(rp) where rd = cost of debt (in this case, 0.07) re = cost of common equity (0.10) rp = cost of preferred stock (0.085) T = tax rate (0.40) wd = weight of debt

  • Assets Liabilities And Equity

    534341 Assets Liabilities And Equity WACC The Patrick Company's year-end balance sheet is shown below. Its cost of common equity is 16%, its before-tax cost of debt is 13%, and its marginal tax rate is 40%.

  • Percy's cost of common equity

    216026 Percy's cost of common equity Percy Motors has a target capital structure of 40 percent debt and 60 percent common equity, with no preferred stock.

  • Weighted Average Cost of Capital

    -Tc)]+[P/V x rpreferred]+[E/V x requity] V = total value of firm D = value of debt P = value of preferred stock E = value of common stock/equity Tc = tax rate rdebt = cost of debt rpreferred = cost of preferred requity = cost of equity

  • cost of common stock that you would use in the WACC formula

    All sources of capital, bonds and other long term debt, common and preferred stock are part of the formula needed for finding the WACC. If everything else is the same, a company's WACC goes up as its return rate on equity and beta both increase.

  • Weighted Average Cost of Capital

    Calculate Foust's after-tax cost of new debt and common equity. Calculate the cost of equity as D1/P0+g. 8.42/65.00+8% B. Find Foust's weighted average cost of capital.

View More Related Solutions