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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)(??)=??

#### 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