Assume that you are on the financial staff of Vanderin Inc., and you have collec

Question

Assume that you are on the financial staff of Vanderin 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 40% debt and 60% common equity. What is the firm's WACC, assuming it must issue new stock to finance its capital budget? a. 6.89% b. 8.34% c. 7.64% d. 6.04% e. None

Explanation / Answer

YTM 7.75%

Tax rate 40%

D1 $0.65

g 6.00%

P0 $15.00

F 10.0%

Weight debt 40%

Weight equity 60%

After tax cost of debt=0.075 x (1-0.4)= 4.5%

rS =( D1/(P0*(1 – F)) + g =0.65/[(15.00)x(1-0.1)]+6%=10.8 %

WACC =wDxrD +wExrS=(0.40 x 0.045) +(0.60)x(0.108)=8.28%

Ans is e None

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects