A financial analyst at Buckco Ltd. wants to compute the companys weighted average cost of capital (WACC) using the dividend discount model. The analyst has gathered the following data:

I don't understand what formulas are being used to calculate this problem. Could you please explain the steps and formulas used? Also where does the 1.8033 come from?

Could you also explain the steps to calculate the WACC for this problem. The equations confuse me because each problem uses different formulas for the cost of equity. Thank you!

A financial analyst at Buckco. Ltd. wants to compute the company's weighted average cost of capital (WACC) using the dividend discount model. The analyst has gathered the following data: 8% 40% 0.8033 Before-tax cost of new debt Tax rate Target debt-to-equity ratio Stock price Next year's dividend Estimated growth rate $30 $1.50 7% Cost of equity = D/P +g= $1.50/$30 + 7% = 5% +7% = 12% D/D+E) = 0.8033/1.8033 = 0.445 WACC = [(0.445)(0.08)(1 0.4)] + [(0.555)(0.12)] = 8.8% 13. The WACC using the following assumptions is Debt = $300 million Interest rate = 8% Risk Free rate = 3 % Equity = $700 million Tax = 40% Beta 1.2 Risk premium = 6% Cost of equity = 3%+ 1.2x (6) = 10.20 (300/1000) x (1 - 40%) x 8 + 10.20 x 700/1000 =8.58%