An analyst has collected the following information regarding Christopher Co.: ·
ID: 2624041 • Letter: A
Question
An analyst has collected the following information regarding Christopher Co.:
· The company's capital structure is 70 percent equity and 30 percent debt.
· The yield to maturity on the company's bonds is 9 percent.
· The company's year-end dividend is forecasted to be $0.80 a share.
· The company expects that its dividend will grow at a constant rate of 9 percent a year.
· The company's stock price is $25.
· The company's tax rate is 40 percent.
· The company anticipates that it will need to raise new common stock this year, and total flotation costs will equal 10 percent of the amount issued.
Refer to the information given for Christopher Co. Assume the company accounts for flotation costs by adjusting the cost of equity capital. Given this information, calculate the company's cost of equity, including flotation costs.
Explanation / Answer
WACC = Wd*Kd*(1-t) + We * Ke
= 0.3* 9*0.6 + 0.7* 12.5 = 10.4%
P0(1-f)=D1/(Ke-g)