Calculate the company’s weighted average cost of capital. Use the dividend discount model.  Show calculations in Microsoft® Word.

Corporate investment decisions | Business & Finance homework help

The dividend discount model (DDM) is a method of valuing a company by estimating the present value of future dividends. This can be calculated using the following formula:

WACC = r_D * D/V + r_E * (1-T)* E/V

Where:
r_D = required return on equity
D= total dividend paid annually
V= current market value of firm’s outstanding stock
r_E = required return on debt
T= Corporate tax rate
E= total amount of outstanding debt

For this example, let’s assume the following values:
r_D = 9%
D = $2,000
V = $10,000
r_E = 8%
T = 0.35
E= $4,000

[Insert equation here] WACC=(9%*$2,000/$10,000)+(8%*(1-0.35)*$4,000/$10,000)

[Insert answer here] WACC= 9.18%