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

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

Step-by-step 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:

=
`(D1)/(p)* (1-F)+G`

=
`(0.65)/(15)* (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* 4.65+0.55* 10.81`

=
`2.0925+5.9455`

=
`8.04`%