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

Answer 1

Answer: 7.48%

Explanation:

Weighted Average Cost of capital is simply the weighted average of the costs of equity and debt.

Cost of Equity

= $\frac{Next dividend}{Stock Price ( 1 - flotation Costs)} + growth rate$

= $\frac{0.65}{19(1 -0.1)} + 0.06$

= 9.80%

Cost of debt

= Interest ( 1 - Tax)

= 0.075 (1 - 0.40)

= 4.65%

WACC = 9.80% * 0.55 + 4.65% * 0.45

= 7.48%