Problem:
Sorensen Systems Inc. is expected to pay a $2.50 dividend at year end (i.e., D1 = $2.50), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $52.50 a share. The before-tax cost of debt is 7.50%, and the marginal tax rate is 40%. The target capital structure consists of 45% debt and 55% common equity.
Required:
Question: What is the company's WACC if all the equity used is from retained earnings?
Note: Show supporting computations in good form.