Quinlan enterprises stock trades for $52.50 per share. it is expected to pay a $2.50 dividend at year end (d1 = $2.50), and the dividend is expected to grow at a constant rate of 5.50% a year. the before-tax cost of debt is 7.50%, and the tax rate is 40%. the target capital structure consists of 45% debt and 55% common equity. what is the company's wacc if all the equity used is from reinvested earnings? a. 7.07%b. 7.36%c. 7.67%d. 7.98%e. 8.29%

c. 7.67%

Explanation:

The formula to compute WACC is shown below:

= Weightage of debt × cost of debt × ( 1- tax rate) +  (Weightage of  common stock) × (cost of common stock)

where,  

Cost of common equity equals to

= (Current year dividend ÷ price per share) + growth rate

= ($2.50 ÷ $52.50) + 5.50%

= 4.76% + 5.50%

= 10.26%

The other things would remain the same

Now put these values to the above formula  

So, the value would equal to

= (0.45 × 7.5%) × ( 1 - 40%) +  (0.55 × 10.26%)

= 2.025% + 5.643%

= 7.67%

month 1 start amount =$3287.90 interest=(3287.90x0.0145/12)3.97 total to pay=$3291.81 paid =$1200 balance =$2,091.87

month 2 starting amount= $2,091.87 interest =$25.28 total to pay =$2117.15 paid =$1200 balance $917.15

month 3 starting amount =$917.15 interest =$11.08 total to pay =$928.23 paid =$928.23 balance =$0 total to pay 1200+1200+928.23 = $3328.23 it will take 3 months to pay a total of $3328.23

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