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Weighted average cost of capital (WACC)

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Dobson Dairies has a capital structure which consists of 60 percent long-term debt and 40 percent common stock. The company s CFO has obtained the following information:
· The before-tax yield to maturity on the company s bonds is 8 percent.

· The company s common stock is expected to pay a $3.00 dividend at year end (D1 = $3.00), and the dividend is expected to grow at a constant rate of 7 percent a year. The common stock currently sells for $60 a share.

· Assume the firm will be able to use retained earnings to fund the equity portion of its capital budget.

· The company s tax rate is 40 percent.

What is the company s weighted average cost of capital (WACC)?

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Solution Summary

The solution explains how to determine the weighted average cost of capital (WACC)

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WACC = Proportion of debt X after tax cost of debt + Proportion of equity X cost of equity ...

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