John is planning a $2 million expansion. The project is expected to yield an int

Question

John is planning a $2 million expansion. The project is expected to yield an internal rate of return of 9.27%. This expansion will be financed, in part, with debt costing 7.00% before taxes. Marginal tax rate is 25%. Preferred stock pays a dividand of $1.98 per share. The current market price is $12.24 per share. The dividands are expected to increase at an annual rate of 2.00% in the forseeable future. John's target capital structure is as follows:

Assets

Current Assets    $50

Fixed Assets        130

                               180

Liabilities

Current Liabilities                            20

Long term debt &

Owners Equity                                  64

Preferred stock                                 16

Common stock & Retained Earn  80

                                                            180

What is the weighted average cost of capital?

Explanation / Answer

cost of prefferd stock=(1.98/12.24)+2%=18.18%

WACC=( 64/160)*0.0525+(16/160)*0.1818+(80/160)*0.0927=8.55%

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