Question
ABC Inc. finances its operations with 40 percent debt and 60 percent equity. Its net income is $16 million and it has a dividend payout
ABC Inc. finances its operations with 40 percent debt and 60 percent equity. Its net income is $16 million and it has a dividend payout ratio of 30%. Its capital budget is B = $40 million this year. The annual yield on the companys debt is 8% and the companys tax rate is T = 30%. The companys common stock trades at P0 = $75 per share, and its current dividend of D0 = $5 per share is expected to grow at a constant rate of g = 5% a year. The floatation cost of external equity, if it is issued, is F = 3% of the dollar amount issued. What is the companys weighted average cost of capital?
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