WACC WITH NEW COMMON STOCK

WACC WITH NEW COMMON STOCK

Anthony Auto Parts wants to calculate its WACC. The company’s CFO has
collected the following information:

l The company’s long-term bonds currently offer a
yield to maturity of 8%. l The company recently paid a dividend of $2.00 a share
(D0 = $2.00).
l The dividend is expected
to grow at an annual 6% constant rate.
l The company’s stock price is $32.00 a share (P0 = $32.00).

l The company pays a 10% flotation cost whenever it
issues new common stock (F = 10%). l The company’s target capital structure is 75% equity and 25% debt.
l The
company’s tax rate is 40%.
l The
firm’s net income for the coming year is expected to
be $96 million.

l The firm’s dividend payout ratio is 40%.

1. What is the company’s WACC if the equity portion of the capital budget
   is completely

   satisfied by retained earnings?

2. What is Anthony’s retained earnings breakpoint?
3. If the firm’s optimal
   capital budget is $144 million, what marginal WACC should be used to evaluate projects?

 

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