ule 5 Homework Questions Problem 1015 4 Question 10 of20 Che

ule 5 Homework Questions Problem 10.15 4 Question 10 of20 Check My Work (3 remaining) 10. o Click here to read the eBook: The Cost of Retained Earnings, rs Click here to read the eBook: Composite, or Weighted Average, Cost of Capital, WACc WACC AND COST OF COMMON EQUITY o I Kahn Inc. has a target capital structure of 65% common equity and 35% debt to fund its 0 | $9 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 15%, a before-tax 13. O 14. 15. cot of debt of 8%, and a tax rate of 40%. The company\'s retained earnings are adequate O to provide the common equity portion of its capital budget. Its expected dividend next o year (D1) is $3, and the current stock price is $24. 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. b. If the firms net income is expected to be $1.6 billion, what portion of its net income is othe firm expected to pay out as dividends? (Hint: Refer to Equation below.) 20 O Growth rate (1-Payout ratio)ROE Round your answer to two decimal places at the end of the calculations. Do not round Check My Work (3 remaining) 2 4

Solution

15% = 0.65*cost of equity + 0.35*8%*0.6

cost of equity = 20.4923

growth rate = 20.4923 - 3/24 = 7.99%

b. 7.99% = (1 - payout)* 1.6/0.65*9

payout = 70.78%