Question
Long term capital structure of company KL is given below: Sources of capital Book value ($ 000) Debts 80,000 Preferred stock 20,000 Common stock 23,500
Long term capital structure of company KL is given below:
Sources of capital Book value ($ 000)
Debts 80,000
Preferred stock 20,000
Common stock 23,500
Retained earnings 50,000
The interest rate for debt is 10%, and the dividend for common stock is $2 per share and $2.5 per share for preferred stock, respectively. The preferred stock price is $20/share and common stocks are currently trading for $18/share. The net income of the Company is expected to be paid out 40% as dividends and 60% will be added to the retained earnings. The IRR of the company has been measured as 15%. Suppose that the average income tax ratio is 30 % and the corporate tax ratio is 25%, calculate and interpret the WACC of the Company
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