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Question
Your company's stock sells for $50 per share, its last dividend (D0) was $2.00, its growth rate is a constant 5 percent, and the company would incur a flotation cost of 15 percent if it sold new common stock. Net income for the coming year is expected to be $500,000 and the firm's payout ratio is 60 percent. The firm's common equity ratio is 30 percent and it has no preferred stock outstanding. The firm can borrow up to $300,000 at an interest rate of 7 percent; any additional debt will have an interest rate of 9 percent. Your company's tax rate is 40 percent. If the firm has a capital budget of $1,000,000, what is the WACC for the last dollar of capital the company raises?
a. 3.78%
b. 6.76%
c. 9.94%
d. 11.81%
e. 13.25%
Answer
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