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?
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!© BrainMass Inc. brainmass.com December 20, 2018, 6:22 am ad1c9bdddf
The problem deals with estimating the weighted average cost of capital with flotation costs included.