Assume that you are an intern with the Brayton Company, and you have collected t
ID: 2613315 • Letter: A
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 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?
Explanation / Answer
WACC:
= Wd×Kd+We×Ke
= 0.45×[(7.75%)×(1-40%)]+0.55×{[0.66÷($15-10%)]+6%}
= 8.08%