A company has determined that its optimal capital structure consists of 43 percent debt and the rest is equity. Given the following information, calculate the firm's weighted average cost of capital. kd = 7.0 %Tax rate = 35 %P0 = $ 28.86 Growth = 4.9 %D1 = $ 0.94 Show your answer to the nearest. 1%

31.5%

Explanation:

Given from the question kd = 7.0 %

Tax rate = 35 %

P0 = $ 28.86

Growth g = 4.9 %

D1 = $ 0.94

First find the cost of common stock by

rS = D1/P0 + g

=0.94/$28.86 + 0.49

=0.523

= 52.3%

Finally, calculate the weighted average cost of capital WACC,

using rs = 0.523,

Tax rate = 43% = 0.43

Equity E 100% - 43% = 57% = 0.57 and

kd=7.0 % = 0.07

so WACC = (D/A) (1 - Tax rate) kd + (E/A) rs

= 0.43 (1 - 0.43) (0.07) + 0.57 (0.523)

0.0172 + 0.298

= 0.315

= 31.5%