A company finances its operations with half debt and half common equity, earning net income of $30 million with dividend payout ratio of 20%. Its capital budget is $40 million, and the interest rate on debt is 10%, subject to 40% tax rate. The company’s common stock trades at $66 per share currently, based on current dividend of $4 per share, which is expected to grow at a constant rate of 10% per year. The flotation cost of external equity, if issued, will be 5%.

Required:

a) Will the company have to issue external equity?

b) Based on your answer to ‘a’, what is the company’s WACC?

Answer rating: 100% (QA)

Part A Net income 30 million Tax rate 40 After tax net in... View the full answer