Assume that you are on the financial staff of a company, and you have collected

Question

Assume that you are on the financial staff of a company, and you have collected the following data: (1) The yield on the company’s outstanding bonds is 8.00%, and its tax rate is 40%. (2) The next expected dividend is $0.65 a share, and the dividend is expected to grow at a constant rate of 6.00% a year. (3) The price of the common stock is $17.50 per share, and the flotation cost for selling new shares is F = 10%. (4) The target capital structure is 45% debt and the balance is common equity. What is the current WACC of this company? What will be the WACC if it must issue new stock to finance its capital budget maintaining the proportions of its capital structure?

Explanation / Answer

After tax cost of debt=8%*(1-40%)=4.8%

Cost of equity=D/P*(1-F) +g =0.65/(17.5*(1-0.1))+0.06=10.127%

WACC=0.45*4.8%+0.55*10.127%=7.72985%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects