Question
6. Grateway Inc. has a weighted average cost of capital of 11.5%. Its target capital structure is 55% equity and 45% debt. The company
6. Grateway Inc. has a weighted average cost of capital of 11.5%. Its target capital structure is 55% equity and 45% debt. The company has sufficient retained eamings to fund the equity portion of its capital budget. The before-tax cost of debt is 9%, and the company's tax rate is 30%. If the expected dividend and current stock price are R5 and R45, respectively, what is the company's growth rate? 7. J. Ross and Sons Inc. has a target capital structure that calls for 40% debt, 10% preferred stock, and 50% common equity. The firm's current after-tax cost of debt is 6%, and it can sell as much debt as it wishes at this rate. The firm's preferred stock currently sells for R90 per share and pays a dividend of R10. The firm will, however, only net R80 per share from the sale of new preferred stock. Ross's common share currently sells for R40 per share. The firm recently paid a dividend of R2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year. a) What is the firm's component cost of common shares, rS? b) What is the firm's component cost of newly issued preferred shares, rPS? c) What is the firm's weighted average cost of capital (WACC)?
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