Question8 5 pts Sorensen Systems Inc is expected to pay a di

Question8 5 pts Sorensen Systems Inc. is expected to pay a dividend of $3.40 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 $37.50 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\'s WACC if all the equity used is from retained earnings? Your answer should be between 7.36 and 12.57, rounded to 2 decimal places with no special characters. D Question 9 5 pts Sapp Trucking\'s balance sheet shows a total of non-callable $45 million long- 30 FS F6 FT FB

Solution

D1 = $ 3.4 and Current Stock Price = P0 = $ 37.5

Growth Rate = 5.5 %

Cost of Equity = (3.4/37.5) + 0.055 = 0.14567 or 14.567 %

Before-Tax Cost of Debt = 7.5 %, Tax Rate = 40%, Target Debt = 0.45 and Target Equity = 0.55

Target WACC = 7.5 x (1-0.4) x 0.45 + 14.567 x 0.55 = 10.0368 or 10.04 % approximately.