Assume that you are an intern with the Brayton Company, and you have collected t
ID: 2774097 • Letter: A
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 $0.50 a share; the dividend is expected to grow at a constant rate of 6.00% a year; the price of the stock is $25.00 per share; the flotation cost for selling new shares is F = 5%; and the target capital structure is 25% debt and 75% common equity. What is the firm's WACC, assuming it must issue new stock to finance its capital budget?
6.89%
7.24%
7.64%
8.55%
8.44%
6.89%
7.24%
7.64%
8.55%
8.44%
Explanation / Answer
1)After tax cost of debt = 7.75 ( 1- .40)
= 7.75 * .60
= 4.65%
2)EXpected return on equity = [D1 /Price(1-F) ] + g
= [.50 / 25(1-.05) ] + .06
= [.50 / 25*.95] +.06
= [.50 / 23.75 ] +.06
= .0211 +.06
= .0811 or 8.11%
WACC = (4.65 *.25 ) +(8.11 *.75 )
= 1.16 + 6.08
= 7.24 %
correct option is "B" - 7.24%