Question

MicroTech Corporation maintains a capital structure of 40 percent debt and 60 percent common equity. To finance its capital budget for next year, the firm will sell 11% coupon bonds at par value (assume no flotation costs). The firm will finance the rest of its capital expenditures with retained earnings. MicroTech expects next year's dividend to be $1.30 per share. Dividends are expected to grow at 7% per year for the foreseeable future. The current market value of MicroTech's common stock is $30 per share. If the firm has a corporate tax rate of 21%, what is its weighted cost of capital for next year?

Answer 1

weighted cost of capital for next year is 10.27 %.

Step-by-step explanation:

Weighted cost of capital = Ke × (E/V) + Kd × (D/V)

Ke = Cost of Equity

= Dividend Yield + Expected growth rate

= $1.30 / $30.00 + 0.07

= 0.11333 or 11.33 %

Kd = Cost of Debt

= Interest × (1 - tax rate)

= 11% × ( 1 - 0.21)

= 8.69 %

Weighted cost of capital = 11.33 % × 60% + 8.69 % × 40%

= 10.27 %