Marshall Corporation has established a target capital structure of 35 percent de

Question

Marshall Corporation has established a target capital structure of 35 percent debt and 65 percent common equity. The current market price of the firm's stock is P_0 = $28; its last dividend was D_0 = $2.00, and its expected dividend growth rate is 5 percent constant. The YTM (Yield to Maturity) of Favre's outstanding bonds is 10%, and its marginal tax rate is 40%. Sanchez can finance its equity portion with retained earnings. Find the weighted average cost of capital (WACC) of Marshall Corporation.

Explanation / Answer

WACC rd*(1-tc)*(D/V)+re*(E/V) 0.1*(1-0.4)*(0.35/1)+0.05*(0.65/1) = 5.35% rd required return of firm debt financing 1-tc tax adjustment for interest expenses D/V Debt/total Value re the firm cost of euity E/V Equity/Total value

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