Question 8 5 pts Sorensen Systems Inc. is expected to pay a dividend of $3.30 at

Question

Question 8 5 pts Sorensen Systems Inc. is expected to pay a dividend of $3.30 at year end (D?), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for S37.50 a share. The before-tax cost of debt is 750%, and the tax rate is 40%. The target capital structure consists of 45% debt and 55% common equity. What is the company's WACC if all the equity used is from retained earnings? Your answer should be between 7.36 and 12.57, rounded to 2 delomal places, with no special characters 5 pts

Explanation / Answer

P0 = D1 / (Ke - g)

P0 = Current MArket Price of Share

D1 = Dividend at the end of 1st year

Ke = Cost of equity capital

g = Dvidend growth rate

P0 = D1 / (Ke - g)

37.50 = 3.30 / (Ke - 5.50%)

37.50Ke - 37.50 *5.50% = 3.30

37.50Ke = 3.30 + 2.06

Ke = 5.36/ 37.50 = 0.0143 = 14.30%

After tax cost of debt = 7.50%*(1-40%) = 0.045 = 4.5%

WACC

WACC = 9.89%

Weights Cost Weights * Cost Common Equity 0.55 0.143 0.07865 Debt 0.45 0.045 0.02025 WACC 0.0989

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