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Up0
An analyst gathered the following information about Altrian Corporation:
Before-tax cost of new debt: 7%
Corporate tax rate: 30%
Target debt-to-equity ratio: 0.7
Current stock price: $55
Next year’s expected dividend: $4.5
Estimated growth rate: 6%The company’s weighted average cost of capital (WACC) is closest to:
- A. 10.36%
- B. 8.40%
- C. 12.44%
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Up2
The correct answer is A.
Cost of Equity = D1/P0 + g = 4.5/55 + 0.06 = 0.1418
D/(D+E) = 0.7/1.7 = 0.4117
WACC = wd * rd * (1-t) + wp * rp
WACC = 0.4117 * 0.07 * (1-0.3) + (1-0.4117) * 0.1418 = 0.1036 or 10.36%Where
wd = the proportion of debt that a company uses whenever it raises new funds
rd = the before-tax marginal cost of debt
t = the company’s marginal tax rate
wp = the proportion of preferred stock that the company uses when it raises new funds
rp = the marginal cost of preferred stock
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