Assume that you are an intern with the Brayton Company, and you have collected t
ID: 2776648 • 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 $0.65 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?
a. 8.44% b. 6.89% c. 8.04% d. 7.64% e. 7.26%Explanation / Answer
YTM 7.75%
Tax rate 40%
D1 $0.65
g 6.00%
P0 $15.00
F 10.0%
Weight debt 45%
Weight equity 55%
A-T cost of debt 4.65%
re = D1/(P0*(1 – F)) + g 10.81%
WACC = wd(rd)(1 – T) + wc(rs) = 8.038%