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Cost of common equity and WACC

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Patton Paints Corporation has a target capital structure of 40 percent debt and 60 percent common equity, with no preferred stock. Its before-tax cost of debt is 12 percent, and its marginal tax rate is 40 percent. The current stock price is P0 = $22.50. The last dividend was D0 = $2.00, and it is expected to grow at a constant rate of 7 percent.

What is its cost of common equity and its WACC?

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Solution Summary

The solution explains how to calculate the cost of common equity and WACC

Solution Preview

Using the constant growth model
Cost of equity = D1/P0 + g
where
D1 = expected dividend ...

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