Question

Assume that you are on the financial staff of Vanderheiden Inc., and you have collected the following data: The yield on the company’s outstanding bonds is 7.75%, its tax rate is 40%, the next expected dividend 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 $19.00 per share, the flotation cost for selling new shares is F = 10%, and the target capital structure is 45% debt and 55% common equity. What is the firm's WACC, assuming it must issue new stock to finance its capital budget?

Answer 1

WACC = 7.48%

Step-by-step explanation:

We can calculate the Firm's WACC by using Excel.

Let's assume this is our Excel Blank Sheet.

A B C D

1 Particulars Rate Weight Weighted rate

2 Debt = 7.75%(1 - 40%) 0.45 =B2×C2

= 4.65%

3 Equity = (0.65/(19 × (1 - 10%)))+6%

= 9.80% 0.55 = B3×C3

4 WACC =SUM(D2:D3)

Output:

A B C D

1 Particulars Rate Weight Weighted rate

2 Debt = 4.65% 45% 2.09%

3 Equity = 9.80% 55% 5.39%

4 WACC 7.48%