Midwest Electric Company (MEC) uses only debt and common equity. It can borrow u
ID: 2678671 • Letter: M
Question
Midwest Electric Company (MEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 11% as long as it finances at its target capital structure, which calls for 30% debt and 70% common equity. Its last dividend (D0) was $2.50, its expected constant growth rate is 4%, and its common stock sells for $27. MEC's tax rate is 40%.What is its cost of common equity? Round your answer to two decimal places.
What is the WACC? Round your answer to two decimal places.
Explanation / Answer
cost of common equity $27 =$2.50*1.04/(re-4%) re= 13.63% cost of common equity = 13.63% WACC = 13.63%*70% + 11%*(1-40%)*30% =11.52%