Question

9) Marshall Corporation has established a target capital structure of 35 percent debt and 65 percent common equity. The current market price of the firm's stock is P0 = $28; its last dividend was D0 = $2.00, and its expected dividend growth rate is 5 percent constant. The YTM (Yield to Maturity) of Marshall’s outstanding bonds is 10%, and its marginal tax rate is 40%. Marshall can finance its equity portion with retained earnings. Find the weighted average cost of capital (WACC) of Marshall Corporation.

Answer 1

Answer:

$\boldsymbol{ Weighted\;average\;cost\;of\;capital (WACC)=5.35\%}$

Explanation:

This acts as more of a discount price for such an estimation of such a fixed present price of a company. It is often used to analyze investments when it is supposed to measure the opportunity price of the company. It is then used by corporations as the obstacle limit.

Let the total cost of equity to be Re = 5% = 0.05.

Let the market value to be E = 65% = 0.65.

Let V to the total market cost that combined debt and equity = 1 .

Let the total price of debt to Rd = 10% = 0.1.

Let the debt to be D = 35% = 0.35.

Let the income tax rate to be Tc = 40% = 0.4.

                $WACC=\frac{E}{V}\times Re + \frac{D}{V} \times Rd \times(1-Tc)$

                             $=\frac{0.65}{1} \times0.05+\frac{0.35}{1} \times0.1\times(1-0.4)=5.35\%$