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2 https://www.mathxl.com/Student/Player Test.aspx?testld-180290073&centerwin-yes; FIN 310 Spring Quarter 2018 901 Jorgen Parend 6/2/18 6:43 PM Quiz: Capital Budgeting Submit Qui This Question: 1 pt 3 of 6 (0 complete) This Quiz: 8 pts possib Time Warner shares have a market capitalization of $80 billion. The company is expected to pay a dividend of $0.40 per share and each share trades for $20. The growth rate in dividends is expected to be 10% per year. Also, Time Warner has $10 billion of debt that trades with a yield to maturity of 8%. If the firm's tax rate is 30%, compute the WACC? OA. 11.29% ??. 10.16% ??. 9,6% OD, 10.72% of Click to select your answer of

Explanation / Answer

Answer is option a.11.29%

Calculation of Cost of Equity

We know that P0=D1/K-g

Where,

D1-Future dividend
K-Required rate of return
G-Growth rate

20=.40/(k-10%)
20k-2=.40
K=2.4/20=12%

After tax cost of debt=8-30%=5.6%

WACC=(Weight of equity* Cost of equity )+(Weight of debt*after tax cost of debt)

(80/90) *12+ (10/90)*5.6
=10.67+.62=11.29%

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