I have the explanation to the question below, but I need some help understanding

Question

I have the explanation to the question below, but I need some help understanding the terms, and how to find them.

What does   rd = ?

What does   wd= ?

What does   wc = ?

What does      rs = ?

What Does    T =?

Thanks for the help

8 .Assume that you have collected the following data for a firm: 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 $19.00 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?

a.8.68%

b.7.93%

c.7.78%

d.8.76%

e.7.48% (Answer)

Answer: e

Explanation

YTM              7.75%

Tax rate           40%

D1                $0.65

G                  6.00%

P0              $19.00

F                   10.0%

Weight debt               45%

Weight equity             55%

After-tax cost of debt = rd(1 –T) =                   4.65%

Cost of new equity re=D1/(P0 x(1 -F)) + g =   9.80%

WACC = wd(rd)(1 -T) + wc(rs) = 7.48%

Explanation / Answer

rd = This is the interest rate required for the lenders on the loan they provide. In this case, it's YTM (7.5%)

wd = This is the weight of debt (percentage of debt) component in the total capital of the firm.

wc = weight of equity (percentage) component in the total capital of the firm.

rs = new cost of equity, which is calculated as 7.48%

WACC = This stands for weighted average cost of capital. This tells us the cost of the capital a company has considering the debt and equity part as per thier proportions in the capital.

T = tax rate

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