Question

Kuhn does not have any retained earnings available to finance this project, so the firm will have to issue new common stock to help fund it. Its common stock is currently selling for $33.35 per share, and it is expected to pay a dividend of $1.36 at the end of next year. Flotation costs will represent 3% of the funds raised by issuing new common stock. The company is projected to grow at a constant rate of 9.2%, and they face a tax rate of 25%. What will be the WACC for this project?

Answer 1

Answer:

No debt so:

WACC = cost of equity = 13.404%

Explanation:

We calculate the cost of equity using the dividend grow model

$\frac{D_1}{return-growth} = Price$

because there is cost for the issuance, the collected cash from the isuance will be price - flotacion x price so P(1-f)

then we clear for return, which is the cost of equity:

$\frac{D_1}{K_e-growth} = Price(1-f)$

$\frac{D_1}{Price(1-f)} = K_e-growth$

$\frac{D_1}{Price(1-f)} +growth = K_e$

$K_e =\frac{D_1}{P(1-f)} +g$

D1 1.36

P 33.35

f 0.03

g 0.092

Equity Cost 0.134040835

We have no information about debt outstanding in the company, so we should assume is zero.

Therefore the WACC would be equal to the cost of equity

13.404%