Assume that you are an intern with the Brayton Company, and you have collected t

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; dividends is expected to grow at a constant rate of 6.00% a year indefinitely. 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

yield to maturity= 7.75%

tax rate =40%

dividend for next year =$ 0.65

growth =6%

share price =$ 15

flotaton cost =10%

wd =45%

ws   = 55%

rd (1-taxrate) = 7.75%(1-0.40)= 4.65%

re =D1/p*(1-F)+G =0.65/15(1-0.1)+6%=4.81%+6%=10.81%

WACC = wd(rd)(1-T) + ws(rs) =0.45*4.65%+0.55*10.81% =8.04%

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