An analyst has collected the following information regarding Christopher Co.: • The company's capital structure is 70 percent equity, 30 percent debt.
• The yield to maturity on the company's bonds is 9 percent.
• The company's year-end dividend is forecasted to be $0.80 a share.
• The company expects that its dividend will grow at a constant rate of 9 percent a year.
• The company's stock price is $25.
• The company's tax rate is 40 percent.
• 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 percent of the amount issued. Assume the company accounts for flotation costs by adjusting the cost of capital. Given this information, calculate the company's WACC.
A) 10.41%
B) 12.56%
C) 10.78%
D) 13.55%
E) 9.29%

Question

Quizplus · Accepted Answer

The correct answer is A because the WACC is calculated as follows:WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc) + (F/V) * Flotation Costwhere:E = market value of equityV = total market value of the firmRe = cost of equityD = market value of debtRd = cost of debtTc = corporate tax rateF = new common stock to be issuedFlotation Cost = flotation cost as a percentage of new common stock issuedIn this case, we have:E/V = 70%Re = 9%D/V = 30%Rd = 9%Tc = 40%F/V = 10%Flotation Cost = 10%Plugging these values into the formula, we get:WACC = (0.70) * 0.09 + (0.30) * 0.09 * (1 - 0.40) + (0.10) * 0.10WACC = 0.063 + 0.0162 + 0.01WACC = 0.1041 or 10.41%

An Analyst Has Collected the Following Information Regarding Christopher Co