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determined. Using the information given, the following values are arrived at.
Cost of Debt
Floatation cost = P5
Dividend (D p )
kp =
Market Price ( P p )−Floatation Cost
15
kp = = 14.29%
105−5
Cost of common equity is computed for using the dividend growth model.
Dividend = P0.25
D1
ks = +g
P0
0.25(1+0.15)
ks = +0.15 = 17.3%
12.50
Cost of New Common Stock
Dividend = P0.25
Floatation cost = 5%
D1
ke = +g
P 0−FloatationCost
0.25(1+0.15)
ks = +0.15 = 17.4%
12.50−0.625
LCC’s WACC if short term debt were to be excluded would be 14.81% while if short term debt were to be
considered, WACC decreases to just 13.86%.