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Please answer the every question in its entirety and show all of your work. Thank you As a new Investment Analyst for Robinson and Ross
Please answer the every question in its entirety and show all of your work. Thank you
As a new Investment Analyst for Robinson and Ross Capital Management, Inc., you are asked to estimate the weighted average cost of capital (WACC) for Purnell Company. Purnell has a capital structure with 55% debt and 45% equity, a corporate tax rate of 26%, a current market price of stock of Po = $45.00, a current dividend per share of D, = $4.00, a growth rate of g = 5%, thus dividends next year are D = $4.00(1.05) = $4.20. If new debt costs 4% before taxes, what is the WACC for Purnell Company? Calculate the cost of equity capital (Retained Earnings) using the Discounted Cash Flow Model: r = P + g = Calculate the after tax cost of debt rg = before tax cost of debt *(1-corporate tax rate) = WACC = Step by Step Solution
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