Dahmen plc is financed by 60% debt and 40% equity. Dahmen would like to determine their weighted-average cost of capital (WACC) so this can be used to appraise their potential capital investment projects.

1. Describe the WACC.

(4 marks, maximum 200 words)

You have been provided with the following information to allow you to determine Dahmens WACC

• Dahmens bond holders have a required yield of 9%
• Dahmens ordinary shares are currently priced at $40.
• The latest dividend of $4 per share has just been paid.
• The dividend growth rate over the past few years has been 8% and this is expected to continue for the foreseeable future.
• Dahmens corporation tax rate is 35%.

2. Calculate Dahmens WACC.

(6 marks)