1.) WACC Shi Importer’s balance sheet shows $300 million in debt, $50 million in
ID: 2652850 • Letter: 1
Question
1.) WACC
Shi Importer’s balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi’s tax rate is 40%, rd= 6%, rps= 5.8%, and rs =12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC?
2.) Cost of Equity
Radon Home’s current EPS is $6.50. It was $4.42 5yrs ago. The company pays out 40% of its earnings as dividends, and the stock sells for $36.
Calculate the historical growth rate in earnings. (Hint: This is a 5-year growth period.)
Calculate the next expected dividend per share, D1 (Hint: D0= 0.4 ($6.50) = $2.60.) Assume that the past growth rate will continue.
What is Radon’s cost of equity, rs?
Explanation / Answer
Current capital structure Target capital structure Debt 300 M Debt30% of 600M 180 Pref.stock 50 M Pref.stock5%of 600M 30 Common Equity 250 M Common Equity65% of 600 M 390 Total 600 M Total 600 M % of total Cost/rate Weight* Cost 0.3 (1-0.40)=0.60 0.18 0.05 0.058 0.0029 0.65 0.12 0.078 1 0.2609 WACC 26.09%
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