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%; 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?

Answer 1

8.038%

Explanation:

For the computation of the firm's WACC first we need to find out the cost of equity which is shown below:-

Cost of equity = Expected dividend ÷ (Price of the stock × (1 - Flotation cost)) + Growth rate

= $0.65 ÷ ($15.00 × (1 - 10%)) + 6.00%

= 10.81%

Now

WACC = Weight debt × (Cost of debt) × (1 - Tax rate) + Weight of equity × Cost of equity

= 45% × 7.75% × (1 - 40%) + 55% × 10.81%

= 8.038%