Question

Assume that you are an intern with the Brayton Company, and you have collected the following data: The yield on the company's outstanding bonds is 7.75%; its tax rate is 40% and bond flotation cost is immaterial. The expected dividend on the company's common stock to be paid one year form today is $0.65 a share; the dividend is expected to grow at a constant rate of 6.00% a year; the price of the stock is $15.00 per share; the flotation cost for selling new shares is F

Answer 1

Answer: 8.04%

Step-by-step explanation:

First find the after-tax cost of debt;

= 7.75% * ( 1 - 40%)

= 4.65%

Then Expected return on equity;

= (Next dividend / (Price * (1 - F)) ) + g

= (0.65 / (15 * (1 - 10%)) ) + 6%

= 10.81%

WACC = (Weight of debt * cost of debt) + (weight of equity * cost of equity or expected return)

= (0.45 * 4.65%) + (0.55 * 10.81%)

= 8.04%