CE has a capital structure consisting of 37% common stock and 63% debt. A debt i

Question

CE has a capital structure consisting of 37% common stock and 63% debt. A debt issue of $1,000 par value6.2% bond that mature in 15 years and pay annual interest will sell for $972. Common stock of the firm is currently selling for $29.37 per share and the firm expects to pay a $2.27 dividend next year. Dividends have grown at a rate of 5.2% per year and are expected to continue to do so for the foreseeable future. What is CE's cost of capital where the firm's tax rate is 30%. CE's cost of capital is _______%(Round to three decimal places)

Explanation / Answer

Calculation of cost of debt $972 =62/(1+r)+62/(1+r)^2 ....1062/(1+r)^15 r =6.498% Calculation of cost of equity $29.37 =$2.27/(re-5.2%) re=12.93% WACC = 63%*6.498%*(1-30%) +37%*12.93% =7.650%

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