Vandelay Industries has a target capital structure consisting of 30% debt, 10% preferred stock, and 60%...
Vandelay Industries has a target capital structure consisting of 30% debt, 10% preferred stock, and 60% common equity. Vandelay has 20-year, 12% semiannual coupon bonds that sell at their par value of $1,000. The component cost of preferred stock is 12.6%. Vandelay is a constant growth firm with plans to pay a dividend of $2.10, sells for $27.00 per share, and has a growth rate of 8%. Flotation costs on new common stock are 10%, and the firm's marginal tax rate is 25%. What is Vandelay Industries’ WACC assuming they will have to use external equity?
Homework Answers
Case 1: Yield of debt to be used is nominal rate
=30%*12%*(1-25%)+10%*12.6%+60%*(2.10/(27*(1-10%))+8%)
=13.94519%
Case 2: Yield of debt to be used is effective rate
=30%*((1+12%/2)^2-1)*(1-25%)+10%*12.6%+60%*(2.10/(27*(1-10%))+8%)
=14.02619%
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