Question
The YTM on the outstanding bonds for Vold Corp. is 7.75%. Analysts expect Vold common stock, which currently sells for $15 a share, to pay
The YTM on the outstanding bonds for Vold Corp. is 7.75%. Analysts expect Vold common stock, which currently sells for $15 a share, to pay an annual dividend of $0.65 a share one year from today; dividends are expected to grow 6% a year indefinitely. The flotation cost for selling new shares is 10%. Vold has a target capital structure of 45% debt and 55% equity. Compute Volds WACC assuming it has a 40% marginal tax rate and must issue shares of common stock. Use only the Constant Growth Model (DCF) approach, not the bond yield plus risk premium approach, to estimate the firms cost of equity.
Select one:
a. 6.89%
b. 7.26%
c. 7.64%
d. 8.04%
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