Question - Calculate the company's weighted average cost of capital (WACC) under the following assumptions provided by Sue.
The company's long-term bonds currently offer a yield to maturity of 8 percent.
The company's stock price is $50 per share (P0 = $50).
The company recently paid a dividend of $2 per share (D0 = $2.00).
The dividend is expected to grow at a constant rate of 6 percent a year (g = 6%).
The company's target capital structure is 75 percent equity and 25 percent debt.
The company's tax rate is 40 percent.
How do we compute the WACC in this circumstance? Why do we need to be concerned with the WACC?