Schadler Systems Is Expected to Pay a $3

question 57

Multiple Choice

Schadler Systems is expected to pay a $3.50 dividend at year-end (D1 = $3.50) , the dividend is expected to grow at a constant rate of 6.50% a year, and the common stock currently sells for $62.50 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 40% debt and 60% common equity. What is the company's WACC if all equity is from retained earnings?

• A) 8.35%
• B) 8.70%
• C) 9.06%
• D) 9.42%

---

Definitions:

ROA

Return on Assets, a financial ratio indicating how profitable a company is relative to its total assets, used to assess how efficient a company's management is at using its assets.

Capital Structure

The combination of borrowing (debt) and ownership (equity) capital employed by a firm to finance its activities and expansion.

Equity-Financed

The method of funding a business through the sale of shares, thus raising capital without incurring debt.

Fixed Asset Turnover

A financial efficiency ratio that measures how well a company utilizes its fixed assets to generate sales.