Assume that you are on the financial staff of Vanderheiden Inc., and you have co

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?

6.89%

7.26%

7.64%

8.04%

8.44%

Explanation / Answer

8.04%

Cost Of Capital Weight Cost of capital*weight Cost Of debt=7.75*(1-.40) 4.65% 45% 2.09% Ke==+(0.65/(15-1.5))+6% 10.81% 55% 5.95% WACC 8.04%

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