finance-Lauren Corp. is analyzing its capital structure and cost of capital.

QUESTION

Lauren Corp. is analyzing its capital structure and cost of capital. The current yield on its debt is 8.50 percent, and it can issue as much debt as it wishes at this rate. The company’s preferred stock currently sells for $40.00 per share and pays a dividend of $4.50 per share. Lauren’s common stock currently sells for $25.00 per share. The firm recently paid a dividend of $2.00 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 5.00 percent per year. Lauren has a target capital structure that calls for 25 percent debt, 10 percent preferred stock, and 65 percent common equity. Based on the above, what is the firm’s weighted average cost of capital (WACC) if its current tax rate is 35%?SHOW ALL WORK AND USE AT LEAST 4 DECIMAL PLACES IN EACH STEP OF CALCULATION (e.g., 12.25% = .1225)

ANSWER:

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