Question 8 5 pts Sorensen Systems Inc is expected to pay a d

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

Solution

P₀ = D₁ / (K_e - 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 / (K_e - 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