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 $15.00 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? a. 8.04% b. 7.26% c. 7.64% d. 8.44% e. 6.89%

Answer 1

a. 8.04%

Step-by-step explanation:

Cost of equity = [D1/P0(1-f)] + g

= [$0.65/$15(1-0.1)] + 0.06

= 10.81%

Cost of debt = 7.75%(1-0.40)

= 4.65%

WACC = 10.81%x0.55 + 4.65%x0.45

= 8.04%