Sorensen Systems Inc. is expected to pay a $2.50 dividend at year end (D 1 = $2.

Question

Sorensen Systems Inc. is expected to pay a $2.50 dividend at year end (D1 = $2.50), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $67.50 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 45% debt and 55% common equity. What is the company Sorensen Systems Inc. is expected to pay a $2.50 dividend at year end (D1 = $2.50), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $67.50 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 45% debt and 55% common equity. What is the company

Explanation / Answer

67.5= 2.5/(Ke-.055)

Ke=9.2%

WACC= 7.5(1-.4)x.45+(.55x9.2)= 7.085% or 7.09%

therefore answer=d. 7.09%

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