Question

# Assume that you are on the financial staff of Vanderheiden Inc., and you have collected the...

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 \$16.00 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? (Hint: required return on stock needs to be adjusted by flotation cost re = D1/(P0 × (1 - F)) + g) Group of answer choices 8.58% 7.80% 9.61% 9.45% 7.88%

#### Homework Answers

Answer #1

Answer is 7.88%

Debt:

Pre-tax Cost of Debt = 7.75%

After-tax Cost of Debt = Pre-tax Cost of Debt * (1 - Tax Rate)
After-tax Cost of Debt = 7.75% * (1 - 0.40)
After-tax Cost of Debt = 4.65%

Equity:

Expected Dividend, D1 = \$0.65
Growth Rate, g = 6.00%
Current Price, P0 = \$16.00
Flotation Cost = 10%

Cost of Equity = D1 / [P0 * (1 - F)] + g
Cost of Equity = \$0.65 / [\$16.00 * (1 - 0.10)] + 0.06
Cost of Equity = \$0.65 / \$14.40 + 0.06
Cost of Equity = 0.105139 or 10.5139%

WACC = Weight of Debt * After-tax Cost of Debt + Weight of Equity * Cost of Equity
WACC = 0.45 * 4.65% + 0.55 * 10.5139%
WACC = 7.88%

Know the answer?
Your Answer:

#### Post as a guest

Your Name:

What's your source?

#### Earn Coins

Coins can be redeemed for fabulous gifts.

##### Not the answer you're looking for?
Ask your own homework help question
ADVERTISEMENT
##### Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

ADVERTISEMENT