A company\'s capital structure reflects the cumulative results of all the compan

Question

A company's capital structure reflects the cumulative results of all the company's past efforts to raise money to run the company and fund future projects. The capital structure is frequently used as a basis to calculate the company's weighted average cost of capital for economic evaluations. Thumbtack's capital structure is shown in table below. If Thumbtack's combined tax rate is 36%, determine the weighted average cost of capital. Loans 12.36% /yr $3,000,000 Bonds 8.24% / yr $4,500,000 Common Stock $72/share price; $8/shr/yr dividend; 1%/yr share price growth $2,000,000 Retained Earnings 51,500,000

Explanation / Answer

rate of return on retained earnings = rate of return on stock earnings = D1/Po + g

= Do(1+g)/Po + g = 8*(1.01)/72 + 1% = 12.22%

WACC = 3/11*(1-.36)*12.36 + 4.5/11*(1-.36)*8.24 + 3.5/11*12.22 = 8.20%

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