D
re = P\_o (1-F) +g
Problem (12 points): Show all work. No work, no credit
2
Assume that you are on the financial staff of XYZ Corporation, and you have collected the following data:
The yield on the company's outstanding bonds is 7.25%, its tax rate is 30%, the dividend just paid to
investors is $0.65 a share, the dividend is expected to grow at a constant rate of 5.00% a year indefinitely, 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 55% debt and 45% common equity. What is the firm's WACC, assuming it must issue
new stock to finance its capital budget?
'D=7.251
T=30
P=16
I=10
D.=.65 9:5
WACC = W\_D r\_D (1-T) + W\_C (r\_S) FLOTADSBAND'S
?\_?: .65(1.05)
= .6825 = .0474
16(1- .10)
14.4
WACC = (.55) (.0725) (1-.30) + (.45) (.0474)=.04