REVIEW FOR FINAL

Correct answers:

Re = Div1/P0 + g

= $3.00/$60.00 + 0.07

= 0.12 = 12%.

WACC = wdrd(1 - T) + were

= (0.6)(0.08)(1 - 0.4) + (0.4)(0.12)

= 0.0768 = 7.68%.

EXPLAIN why these are the correct answers

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Cost of Capital Dobson Dairies has a capital structure which consists of 60 percent long-term debt and 40 percent common stock. The company's CFO has obtained the following information: The before-tax yield to maturity on the company s bonds is 8 percent. The company's common stock is expected to pay a $3.00 dividend at year end (Div1 $3.00), and the dividend is expected to grow at a constant rate of 7 percent a year. The common stock currently sells for $60 a share (EPSo). The company's tax rate is 40 percent. What is the company's weighted average cost of capital (WACC)