Despite group of companies is a rapidly growing chain of retail outlets offering brand name merchandise at discount price. A security analysts report issued by a national brokerage firm indicates that debt-yielding 10% compose 60% of the company’s overall capital structure. Furthur more, both earnings and dividends are expected to grow at 10% per year. Currently, common stock in the company is priced at gh$ 30 and it should pay gh$ 1.6 per share in dividend during the coming year. This yield compares favourably with the 8% return currently available on risk free securities and the 16% average for all common stocks. Given the company’s estimated Beta (b)= 1.2.
a) Calculate the company’s component cost of equity using CAPM
b) Assuming a 40% marginal income tax rate, calculate the company’s WACC