WACC and Cost of Common Equity Kahn Inc. has a target capital structure of 55% c

Question

WACC and Cost of Common Equity

Kahn Inc. has a target capital structure of 55% common equity and 45% debt to fund its $10 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 12%, a before-tax cost of debt of 8%, and a tax rate of 40%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D1) is $2 and the current stock price is $21.

What is the company's expected growth rate? Round your answer to two decimal places at the end of the calculations.
%

If the firm's net income is expected to be $1.7 billion, what portion of its net income is the firm expected to pay out as dividends? (Hint: Refer to Equation below.)

Growth rate = (1 - Payout ratio)ROE

Round your answer to two decimal places at the end of the calculations.

Explanation / Answer

Growth rate = (1 - Payout ratio)*ROE Weights Cost Weights*cost Equity 0.55 17.89% 9.84% Debt 0.45 4.80% 2.16% WACC 12.00% cost of equity = D1/P0+g D1= dividend P0 = current market price of share G= growth rate 17.89 = 2/21+g .1789= 0.095+g g= .1789-.095 8.39% Expected growth rate = 8.39% 8.39%= (1-payout)*17.89% (1-payout)= 8.39/17.89 0.469 Payout=1-.469 Payout ratio= 0.531

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