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Finance: WACC with flotation cost.

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WACC, equity from new stock, uses DCF
10. Assume that you are on the financial staff of Christopher Inc., and you have collected the following data: (1) The yield on the companyâ??s outstanding bonds is 7.0%, and its tax rate is 40%. (2) The expected year-end dividend is $0.80 a share, the dividend is expected to grow at a constant rate of 6% a year, the price of Christopher's stock is $25 per share, and the flotation cost for selling new shares is 10%. (3) The target capital structure is 40% debt and 60% equity. What is Christopher's WACC assuming that it must issue new stock to finance its capital budget?

a. 7.11%
b. 7.26%
c. 7.41%
d. 7.67%
e. 7.89%

Here is the basic WACC equation: WdRd(1-T) + WpRp + WcRe. I'm having trouble with the second and third parts of the equation. With WpRp, the problem doesn't specify the weight of preferred stock (Wp). Also, for WcRe, I can't figure out how to calculate Re with a 10% flotation cost. Help!

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Solution Summary

The problem deals with estimating the weighted average cost of capital with flotation costs included.