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Cost of common equity and WACC

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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)(??)=??

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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 ...

Solution Summary

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

$2.19
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Cost of common equity and WACC..

Midwest Electric Company (MEC) uses only debt and equity. It can borrow unlimited amounts at an interest rate of 10 percent as long as it finances at its target capital structure, which calls for 45 percent debt and 55 percent common equity. Its last dividend was $2, its expected constant growth rate is 4 percent, and its stock sells for a price of $20. MEC's tax rate is 40%.

a. What is the company's cost of common equity?

b. What is the company's WACC?

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