Allison Engines Corporation has established a target capital structure of 40% debt and 60% common equity. The current market price of the firm's stock is P0 = $36; its last dividend was D0 = $2.80, and its expected dividend growth rate is 8%. Allison must issue new common stock at a flotation cost of 10%. Tax rate is 40%.
Find:
1. What is Allison's cost of new outside equity capital, i.e., cost of new equity?
2. Given a cost of new debt of 8%, find Allison's WACC.
Hint: use constant growth formula to find Rs