CE has a capital structure consisting of 42% common stock and 58% debt. A debt i

Question

CE has a capital structure consisting of 42% common stock and 58% debt. A debt issue of $1,000 par value, 5.5% bonds that mature in 15 years and pay annual interest will sell for $975. Common stock of the firm is currently selling for $29.84 per share and the firm expects to pay a $2.25 dividend next year. Dividends have grown at a rate of 5.3% per year and are expected to continue to do so for the foreseeable future. If the firms tax rate is 30%. What is CE's cost of capital ________% (Round to three decimal places)

Explanation / Answer

Calculation of cost of debt $975 =55/(1+r) +55/(1+r)^2 +55/(1+r)^3 ....1055/(1+r)^15 r=5.753% Calculation of cost of equity $29.84=$2.25/(re-5.3%) re=12.84% WACC =12.84%*42% +5.753%*58%*(1-30%) =7.729%

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