Case Scenario: Dobson Dairies has a capital structure which consists of 60 percent long-term debt and 40 percent common stock. The company s CFO has obtained the following information:
1) The before-tax yield to maturity on the company's bonds is 8 percent.
2) The company s common stock is expected to pay a $3.00 dividend at year end (D1 = $3.00), and the dividend is expected to grow at a constant rate of 7 percent a year. The common stock currently sells for $60 a share.
3) Assume the firm will be able to use retained earnings to fund the equity portion of its capital budget.
4) The company s tax rate is 40 percent.
What is the company s weighted average cost of capital (WACC)?