09_Task Performance_1

WACC (20 points: 2 items x 10 points)

Read and analyze each given scenario and provide what is asked. Show your complete solutions.

Markcaster Engineering, Inc. (MEI) has the following capital structure, which it considers to be optimal:

Debt 25%
Preferred Stock 15%
Common Equity 60%
100%

MEI’s expected net income this year is P34,285.72, its established dividend payout ratio is 30%, its tax rate is
30%, and investors expect future earnings and dividends to grow at a constant rate of 9%. MEI paid a
dividend of P3.60 per share last year, and its stock currently sells for P54.00 per share. MEI can obtain new
capital in the following ways:

(a) New preferred stock with a dividend of P11.00 can be sold to the public at P95.00 per share.
(b) Debt can be sold at an interest rate of 12%.

Required:
1. Determine the cost of each capital component.

 After tax cost of debt

= rd (1 – T)
= 12% (1 – 0.3)
= 12% (0.7)
= 8.4%

 Cost of Common Equity

rs = D1 + g
rs = (3.60 × 9% +3.60) + 9%
rs = 3.924 + 9%
rs = 15.5%

2. Calculate the WACC.

WACC = wd rd (1 – T) + wp rp + wc rs
WACC = 0.25(12%) (1 – 0.3) + 0.15(11.6%) + 0.60(15.5)
WACC = 2.1 + 1.74 + 9.3
WACC = 13.14%