Patton paints has a target capital structure of 40% debt and 60% equity with no preferred stock....

Question:

Patton paints has a target capital structure of 40% debt and 60% equity with no preferred stock. It'd before tax cost of debt is 12% and marginal tax rate is 40% . The current stock price is $22.50. The last dividend was $2.00 (Do) and is expected to grow at a constant rate of 7%. What is the cost of common equity and WACC ?

Weighted Average Cost of Capital:

A company's capital structure consists of several sources of funds such as Common stock, Preferred stock and debt. Each source of fund has its own cost. Weighted Average Cost of Capital is the weighted average cost of all these sources of funds.

Answer and Explanation:

1. Cost of common equity is 16.51%

2. WACC is 12.786%

Calculating cost of common equity:

  • Price per share, P = $22.50
  • D0 = $2.00
  • growth rate, g = 7%...

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Weighted Average Cost of Capital

from Finance 101: Principles of Finance

Chapter 14 / Lesson 5
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