An analyst has collected the following information regarding Christopher Healthc

Question

An analyst has collected the following information regarding Christopher Healthcare: - The company’s capital structure is 70 percent equity, 30 percent debt. - The yield to maturity on the company’s bonds is 9 percent. - The company’s year-end dividend is forecasted to be $0.80 a share. - The company expects that its dividend will grow at a constant rate of 9 percent a year. - The company’s stock price is $25. - The company’s tax rate is 40 percent. - The company anticipates that it will need to raise new common stock this year. Its investment bankers anticipate that the total flotation cost will equal 10 percent of the amount issued. Assume the company accounts for flotation costs by adjusting the cost of capital. Given this information, calculate the company’s CCC.

Explanation / Answer

Cost of equity = [D1 /price(1 -F) ] +g

                    = [.80 / 25 (1- .10) ] +.09

                   = [.80 / 25*.90] +.09

                   = [.80 / 22.5] +.09

                   = .0356 +.09

                 =   .1256 or 12.56%

After tax cost od debt = 9 ( 1- .40 )

                                 = 9 *.60

                                 = 5.40%

Cost of capital = (Debt *Wd) + (equity *We)

                       = (5.40 * .30 ) +(12.56 * .70)

                       = 1.62 + 8.79

                       = 10.41%

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