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 10%, and the target capital structure is 45% debt and 55% common equity. What is the firm's WACC, assuming?

Answer 1

Answer:

The firm's WACC will be "8.04%".

Explanation:

The given values are:

Yield of maturity,

= 7.75%

Rate of tax,

= 40%

Next year's dividend,

= $o.65

Growth,

= 6%

Share price,

= $15

Flotation cost,

= 10%

$w_d=45 \ percent$

$w_s=55 \ percent$

Now,

= $r_d(1-Rate \ of \ tax)$

On substituting the values, we get

= $7.75(1-0.40)$

= $4.65 \ percent$

The $r_e$ will be:

= $\frac{D1}{p}\times (1-F)+G$

= $\frac{0.65}{15}\times (1-0.1)+6$

= $4.81+6$

= $10.81 \ percent$

hence,

The firm's WACC will be:

= $w_d(r_d)(1-T)+w_s(r_s)$

= $0.45\times 4.65+0.55\times 10.81$

= $2.0925+5.9455$

= $8.04$%