Palencia Paints Corporation has a target capital structure of 35% debt and 65% common equity, with no preferred stock. Its before-tax cost of debt is 8%, and its marginal tax rate is 25%. The current stock price is P0 = $29.00. The last dividend was D0 = $2.25, and it is expected to grow at a 6% constant rate. What is its cost of common equity and its WACC? Do not round intermediate calculations. Round your answers to two decimal places.

Here in the question we have been given the weight of debt(35% debt) and weight of equity(65% equity), with marginal tax rate as 25%, PO which is current stock price as $29 and DO which is he last dividend as $2.25, and lastly with growth rate of 6%.

So for us to calculate the cost of common equity, we have to use the approach of discounted cash flow(DCF), where we will us the formula of -

Dividend in the first year (D1) / Current price of stock (PO) + growth rate

Here we know the value of PO and growth rate but don't know the D1, so firstl we will have to calculate the D1 using formula =

D1 = D0 (1+GROWTH RATE)

= $2.25 ( 1+6%)

= $2.25 (1+.06)

= $ 2.385

Now putting the value of D1 in cost of common equity formula,

= $2.385 / $29 + 6%

= .082 + .06

= .142 ( when multiplied by 100 to make in percentage we get 14.2%)

therefore the cost of common equity is 14.2%

For taking out WACC ( weighted average cost of capital ) we will use the formula of =

weight of debt [cost of debt(1 - marginal tax rate)] + weight of equity x cost

of equity

= 35% [8%(1 - 25%)] + 65% x 14.2%

= .35 [.08(.75)] + .65 x .142

= .35 x .06 + .0923

= .021 + .0923

= .1133 ( multiplying by 100 to make it in percentage)

= 11.33%