The dividend is expected to grow at a constant rate

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Sorensen Systems Inc is expected to pay a $2.50 dividend at year end (D1=$2.50), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $52.50 a share. 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 equity used is from retained earnings?

Also, if the company does not have any retained earnings and must raise all the equity from new common stock, where F, the flotation percentage is 10%, calculate the new WACC due to this higher cost of equity. Why does the new equity cost more than retained earnings?

Reference no: EM13943717

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