ABC Inc. finances its operations with 40 percent debt and 60 percent equity. Its net income is $30 million and it has a dividend payout ratio of 30%. Its capital budget is B = $100 million this year. The annual yield on the company’s debt is 7% and the company’s tax rate is T= 30%. The company’s common stock trades at PO = $100 per share, and its current dividend of DO = $4 per share is expected to grow at a constant rate of g = 5% a year. The floatation cost of external equity, if it is issued, is F = 1.5% of the dollar amount issued. What is the company’s weighted average cost of capital?
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