Power Financial Corp has a current share price of $34,and a market capitalization of $24 billion.The company is expected to pay a dividend of $0.37 per share,with a dividend growth rate of 4% per year.The firm has $18 billion of debt with a yield to maturity of 6%.If the firm's tax rate is 30%,what is Power Financial's WACC?
A)5.00%
B)4.65%
C)4.71%
D)5.49%
E)5.55%

Question

Quizplus · Accepted Answer

First, we need to calculate the cost of debt (rd): 
rd = yield to maturity x (1 - tax rate) 
rd = 6% x (1 - 0.30) = 4.2%

Next, we need to calculate the cost of equity (re) using the dividend discount model: 
re = (dividend / current stock price) + dividend growth rate 
re = ($0.37 / $34) + 0.04 = 0.0541 or 5.41%

We also need to calculate the market value of equity (E) and the market value of debt (D): 
E = current share price x number of shares outstanding 
E = $34 billion / $34 = $1 billion

D = $18 billion

Finally, we can calculate the weighted average cost of capital (WACC) using the formula: 
WACC = (E / (D + E)) x re + (D / (D + E)) x rd x (1 - tax rate) 
WACC = ($1 billion / ($18 billion + $1 billion)) x 5.41% + ($18 billion / ($18 billion + $1 billion)) x 4.2% x (1 - 0.30) 
WACC = 4.71%

Therefore, the answer is C) 4.71%.

Power Financial Corp Has a Current Share Price of $34,and