Helms Aircraft has a capital structure, which consists of 60 percent debt and 40 percent common stock. The company's equity financing will come from issuing new common stock. The company recently issued bonds with a yield to maturity of 9 percent. The company's stock is currently trading at $40 a share. The year- end dividend is expected to be $4 a share (that is, D(1) = $4.00), and the dividend is expected to grow at a constant rate of 5 percent. The flotation costs associated with issuing new common stock are estimated to be 10 percent. The company's tax rate is 35 percent. What is the company's weighted average cost of capital?
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A. B. C. D. E.E
Calculate the after-tax cost of debt = (1 - 0.35) 9% = 5.85%.
Calculate the cost of new equity: k(e) = $4/[$40(1 - 0.1)] + 0.05 = 0.1611 or 16.11%. Compute WACC (Weighted Average Cost of Capital): 0.6(5.85%) + 0.4
(16.11%) = 9.95%.