Question
Suppose stock in Watta Corporation has beta of .80. The market risk premium is 6 percent, and the risk-free rate is 6 percent. Wattas last
Suppose stock in Watta Corporation has beta of .80. The market risk premium is 6 percent, and the risk-free rate is 6 percent. Wattas last dividend was $1.20 per share, and the dividend is expected to grow at 8 percent indefinitely. The stock currently sells for $45 per share. What is Wattas cost of equity capital?
In addition to the information given in the previous problem, suppose Watta has a target debt-equity ratio of 50 percent. Its cost of debt is 9 percent, before taxes. If the tax rate is 35 percent, what is the WACC?
Suppose in the previous problem Watta is seeking $30 million for a new project. The necessary funds will have to be raised externally. Wattas flotation costs for selling debt and equity are 2 percent and 16 percent, respectively. If flotation costs are considered, what is the true cost of the new project?
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