Patton Paints Corporation has a target capital structure of 35.60% debt and 64.4
ID: 2712983 • Letter: P
Question
Patton Paints Corporation has a target capital structure of 35.60% debt and 64.40%common equity, with no preferred stock. Its before-tax cost of debt is 7.80%, and its marginal tax rate is 30.00%. The current stock price is $22.00. The last dividend was $2.10, and it is expected to grow at a 5.40% constant rate.
a) What is its cost of common equity?
b) What is its WACC?
Question 20 options:
a)9.26%; b)8.03%
a)15.46%; b)11.57%
a)14.95%; b)11.57%
a)15.46%; b)11.90%
a)9.55%; b)8.09%
a)9.26%; b)8.03%
a)15.46%; b)11.57%
a)14.95%; b)11.57%
a)15.46%; b)11.90%
a)9.55%; b)8.09%
Explanation / Answer
cost of equity = D0(1+g) /current price + g
= 2.10 (1+.054) / 22 + .054
= 2.10 * 1.054 /22 +.054
= .1006 + .054
= 15.46%
WACC= [After tax cost of debt *WD] +[COst of equity *We]
= [7.8 (1-.3) * .356 ] + [15.46*.644]
= [7.8 *.7 *.356 ]+ 9.956
= 1.944 + 9.956
= 11.9%
correct option is "D"