Assume that you are on the financial staff of Vanderheiden Inc., and you have co
ID: 2750358 • Letter: A
Question
Assume that you are on the financial staff of Vanderheiden 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 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
Kd = 7.75 X (1-0.4) = 4.65%
Net Stock Price = 15 X (1 - 0.1)
= $13.5 per share
Ke = D1/Po + g
= 0.65/13.5 + 0.06 = 10.81%
WACC = (4.65 X 45%) + (10.81 X 55%)
= 8.038%