Munich Re Inc is expected to pay a dividend of 482 in one ye

Munich Re Inc. is expected to pay a dividend of $4.82 in one year, which is expected to grow by 4% a year forever. The stock currently sells for $75 a share.

The before-tax cost of debt is 5% and the tax rate is 34%.

The target capital structure consists of 40% debt and 60% equity.
What is the company\'s WACC?

Solution

Required return for common stock=(D1/ Current price)+Growth rate

=(4.82/75)+0.04=10.4267%(Approx)

After-tax cost of debt=Before tax cost of debt*(1-tax rate)

=5(1-0.34)=3.3%

WACC=Respective costs*Respective weights

=(10.4267*0.6)+(3.3*0.4)

which is equal to

=7.576%