.0000 Lyca mobile 11:55 AM x Practice Finance N... Practice Finance Manning Corp
ID: 2782818 • Letter: #
Question
.0000 Lyca mobile 11:55 AM x Practice Finance N... Practice Finance Manning Corporation has established a target capital structure of 40 percent debt and 60 percent common equity. The current market price of the firm's stock is Po= S28: its last dividend was Do= $2.00, and its expected dividend growth rate is 5 percent constant. The YTM (Yield to Maturity) of Manning's outstanding bonds is 10%, and its marginal tax rate is 40%. Manning can finance its equity portion with retained earnings. Find the weighted average cost of capital (WACC) of Manning Corporation.Explanation / Answer
Cost of equity=(Dividend for next period/Current price)+Growth rate
=(2*1.05)/28+0.05
=12.5%
Cost of debt after tax=10(1-0.4)=6%
WACC=Respective costs*Respective weights
=(12.5*0.6)+(6*0.4)
=9.9%
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