Question
Byron Corporations target capital structure consists of 40% debt and 60% common equity. Assume that the firm has no retained earnings. The companys last dividend
Byron Corporations target capital structure consists of 40% debt and 60% common equity. Assume that the firm has no retained earnings. The companys last dividend (D0) was $2.00, which is expected to grow at a constant rate of 5%; and the current stock price is $21.88. Byron can raise all the debt financing it needs at 14%. If Byron issues new common stock, a 20% flotation cost will be incurred. The firms tax rate is 40%.
What is the component cost of the equity raised by selling new common stock?
a. 17.0%
b. 16.4%
c. 15.0%
d. 14.6%
e. 12.0%
What is the firm's WACC?
a. 10.8%
b. 13.6%
c. 14.2%
d. 16.4%
e. 18.0%
Please show calculations.
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