Weighted Average Cost of Capital (WACC)

Ms. Morrison wants you to use the weighted average cost of capital (WACC) as the required return. PCH currently has 40 million common shares that are trading at $40 per share. The dividend is expected to increase to $4.00 per share in the next period. PCH also has 1 million preferred shares that get $2.5M in dividends and are currently trading at $25 per share. Ms. Morrison wants you to determine the cost of preferred equity and common equity, using dividends and share price. The anticipated constant growth rate for common dividends is 4%.

The total market value of debt that PCH expects to have going into this investment is $150M. The before-tax cost of debt is approximately 6%. Ms. Morrison wants you to determine the after-tax cost of debt to be used in the WACC. A tax rate of 20% has been suggested for use in the analysis.