An analyst has collected the following information regarding Christopher Co.: •

Question

An analyst has collected the following information regarding Christopher Co.:

• The company’s capital structure is 60% equity and 40% debt.
• 10-year bond is sold at 1325.20 with 14% coupon rate.
• The company’s year-end dividend is forecasted to be $1.50 a share.
• The company expects that its dividend will grow at a constant rate of 7 % a year.
• The company’s stock price is $25.
• The company’s tax rate is 40%.
• The company anticipates that it will need to raise new common stock this year. Its investment bankers anticipate that the total flotation cost will equal 10% of the amount issued. Assume the company accounts for flotation costs by adjusting the cost of capital. Given this information, What is the company's WACC?

Explanation / Answer

COst of Equity = Ks = D1/(P0*(1-f)) +g where f is flaotaion cost SO we have Ks = 1.50/(25*(1-10%)) +7% = 13.67% We have coupon =14%. SO PMT =14%*1000 = 140 PV=1325.20, FV=1000 So Current yield Kd=Rate(nper,pmt,pv,fv) = Rate(10,140,1325.20,1000) = 8.94% We know WACC = Kd*(1-T)*Wd + Ks*Ws where Ws&Wd are weights of Equity & Debt, Kd & Ks are Before Tax cost of Debt & Cost of equity. SO We have WACC = 8.94%*(1-40%)*40% + 13.67%*60% = 10.36%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.