Assume That You Are an Intern with the Brayton Company,and

question 17

Multiple Choice

Assume that you are an intern with the Brayton Company,and you have collected the following data: The yield on the company's outstanding bonds is 7.75%;its tax rate is 40%;the next expected dividend is $0.65 a share;the dividend is expected to grow at a constant rate of 6.00% a year;the price of the stock is $15.00 per share;the flotation cost for selling new shares is F = 10%;and the target capital structure is 45% debt and 55% common equity.What is the firm's WACC,assuming it must issue new stock to finance its capital budget?

• A) 6.89%
• B) 7.26%
• C) 7.64%
• D) 8.04%
• E) 8.44%

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Definitions:

Shares Outstanding

The total number of shares of stock that are currently owned by shareholders, including those held by institutional investors and restricted shares.

Share Price

The price of a single share of a company's stock, determined by market supply and demand.

Stock Dividend

Increases the number of shares outstanding, but at a slower rate than splits. Current shareholders receive additional shares on some proportional basis. Thus, a holder of 100 shares would receive 5 additional shares at no cost if a 5% stock dividend were declared.

Shareholder's Wealth

The total value of an individual's or entity's equity in a firm, essentially reflecting the market value of their shares.