A firm provides the following information New Debt financing

A firm provides the following information:

New Debt financing will cost 12%

Their capital structure includes 45% debt

Common shares currently sell for priceis $20

the nest anticipated dividend (D1) will be $2.00

The firms tax rate is 35%

the firm growth rate for the foreseeable future is 7%

Calculate their WACC:___________

Solution

Cost of equity=(D1/Current price)+Growth rate

=(2/20)+0.07

=17%

After tax cost of debt=12(1-tax rate)

=12(1-0.35)=7.8%

Weight of equity=(100-45)=55%

Hence WACC=Respective costs*Respective weights

=(0.55*17)+(0.45*7.8)

which is equal to

=12.86%