WACC AND COST OF COMMON EQUITY Kahn Inc. has a target capital structure of 60% c
ID: 2801195 • Letter: W
Question
WACC AND COST OF COMMON EQUITY Kahn Inc. has a target capital structure of 60% common equity and 40% debt to fund its $9 billion in operating assets. Furthermore, Kahn Inc. has a wACC of 15%, a before-tax cost of debt of 996, and a tax rate of 40%. The company's retained earnings are adequate to provide the common equity portion of ts capital budget. Its expected dividend next year (D1) is $3, and the current stock price is $30. a. What is the company's expected growth rate? Round your answer to two decimal places at the end of the calculations. Do not round your intermediate calculations. 11.4 b. If the firm's net income is expected to be $1.4 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. Do not round your intermediate calculations. 5.74 0Explanation / Answer
WACC = cost of equity x Wequity +cost of Debt x Wdebt
15% = Ke x 60% + 9%(1-40%) x 40%
Ke = 21.4%
Equity Price = D1 /(Ke-g)
30 = 3 / (21.4-g)
g=11.4%
2) Growth Rate = (1-Payout Ratio) x ROE
11.4% = (1-Payout) x 21.4%
Payout Ratio = 46.73%
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