Problem 10-15 WACC and Cost of Common Equity

Kahn Inc. has a target capital structure of 40% common equity and 60% debt to fund its $10 billion in operating assets. Furthermore, Kahn Inc. has a WACC of 15%, a before-tax cost of debt of 9%, and a tax rate of 40%. The company's retained earnings are adequate to provide the common equity portion of its capital budget. Its expected dividend next year (D1) is $2 and the current stock price is $24.

What is the company's expected growth rate? Round your answer to two decimal places at the end of the calculations. _____ %

If the firm's net income is expected to be $1.5 billion, what portion of its net income is the firm expected to pay out as dividends? (Hint: Refer to Equation below.) Growth rate = (1 - Payout ratio)ROE Round your answer to two decimal places at the end of the calculations. _______ %