Radiator Products Company is at its optimal capital structure of 75 percent comm
ID: 2648413 • Letter: R
Question
Radiator Products Company is at its optimal capital structure of 75 percent common equity and 25 percent debt. RPCs WACC is 12.50 percent. RPC has a marginal tax rate of 40 percent. Next years dividend is expected to be $2.50 per share, and RPC has a constant growth in earnings and dividends of 5 percent. The cost of common equity used in the WACC is based on retained earnings, while the before?tax cost of debt is 10 percent. What is RPCs current equilibrium stock price?
a. $12.73 b. $17.23 c. $25.83 d. $20.37 e.23.70
Explanation / Answer
WACC = Weight of Equity* Cost of Equity + Weight of Debt* After Tax cost of Debt
12.50 = 75%*Cost of Equity + 25%*10*(1-40%)
12.50= 75%*Cost of Equity + 1.50
Cost of Equity = (12.50-1.50)/75%
Cost of Equity = 14.67%
RPC
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