Byron Corporation’s present capital structure, which is also its target capital structure, is 40 percent debt and 60 percent common equity. The company’s earnings and dividends are growing at a constant rate of 5 percent; the last dividend (D0) was $2.00; and the stock is currently selling for $21.88. Byron can raise all the debt financing it needs at 14 percent. The firm’s marginal tax rate is 40 percent.

a. What is the component cost of equity in the form of retained earnings?

b. Ignore the answer to part a and assume the component cost of equity is 18 percent. What is the weighted average cost of capital (WACC)?