Please help me with both questions Hight & Co. has a target capital structure of
ID: 2669862 • Letter: P
Question
Please help me with both questions
Hight & Co. has a target capital structure of 60% debt and 40% common equity, with no preferred stock. The firm's cost of common equity it 12.5% and its WACC it 8.780%. If the firm's tax rate it 30%. what it the before - tax yield on Hight's long - term debt? 8.8% 8.4% 9.0% 9.2% 8.2% Hight can finance its capital budget with retained earnings throughout the foreseeable future, and its stock price is expected to grow at a constant rate Hight's expected long - run sustainable return on equity (ROE) it 15%, and the firm expects to maintain its dividend payout ratio of 70%. If Hight uses the DCF approach to calculate its cost of retained earnings, what it the expected dividend yield on Hight's stock? 4.5% 8.0% 2.0% 2.9% 7.7%Explanation / Answer
We know WACC = Kd*(1-T)*Wd + Ks*Ws where Ws&Wd are weights of Equity & Debt, Kd & Ks are cost of Debt & Cost of equity. Also we have WACC=8.78%, Ks = 12.5% and T=40% Also Wd =60% & Ws=40% SO WACC = Kd*(1-30%)*60% + 12.5%*40% = 8.780% ie 42%Kd = 8.780% -5.00% ie Kd = 3.78%/42% = 9.00% .................Ans (1) From DCF, we have g = (Retention rate)(ROE) = (1.0 - Payout rate)(ROE) ie g = (1-70%)*15% = 4.50% So expected Div yield = 4.5%..............Ans(2)