Question: (a) Your company's profit before taxes is €600,000. The firm intends to maintain its dividend payout ratio of 15%. You estimate that the firm's profits before taxes will grow at 4% per year, and the dividend increase will be the same. Assuming the firm's equity has market value of €12,000,000 and that its corporate tax rate is 12%, what is the firm's cost of equity?
(b) Calculate the WACC in the following case: The company has 3,200,000 shares, currently sold for €1.80 per share. The company's debt/equity ratio is 0.6. The interest paid last year by the company was €250,000. The firm's corporate tax rate TC is 12.5%. The firm's cost of equity rE is 7%.