ABC Co. finances its operations with 40% debt and 60% equity. The dividend payou
ID: 2738884 • Letter: A
Question
ABC Co. finances its operations with 40% debt and 60% equity. The dividend payout ratio is 25% and the net income is $16 million. The capital budget is $15 million this year. ABC Co. annual yield on company debt is 10% and the tax rate is 30%.
The company common stock trades at $55/share and its current dividend is $5 per share and is expected to grow at a constant rate of ten percent a year. Floatation costs of external equity, if it were issued, is 5% of the dollar amount issued. What is ABC Co. WACC?
Explanation / Answer
Cost of equity = $5 / [$55 * (1 - 5%)] + 10%
= 19.57%
After tax cost of debt = 10% * (1 - 30%)
= 7.00%
WACC = 0.40 * 7.00% + 0.60 * 19.57%
= 14.54%