Rain Droplets Technologies, a leading social media company, has just paid a dividend of £5 per share. The company's equity is valued at £60 per share based on a forecast that the company's dividends will increase at a constant rate of 5%. Suppose that Rain Droplets has a debt-to- equity ratio of 0.8 and its pre-tax cost of debt is 8%. The company pays corporate tax at 40%. REQUIRED: i. Determine Rain Droplets' cost of equity using the dividend growth model. ii. Briefly discuss the potential drawbacks of the dividend growth model.
iii. Calculate the company's weighted average cost of capital (WACC).
