WACC Problems Thompson Corporation is considering four a return: verage-risk pro

Question

WACC Problems Thompson Corporation is considering four a return: verage-risk projects with the following costs and rates of Projest Cos $2,000 S3,000 $5,000 $2,000 12.75% 11.25% 1 0.85% 10.25% Thompson Corporation estimates that it can issue debt at a rate of r-8%, and its tax rate is 35%, Thompson can issue preferred stock for $110 and expects to pay a perpetual constant preferred dividend of $10 per year. Thompson Corp.'s common stock has a beta of 1.3. The risk free rate is 4% and the market risk premium, is 8%. The company expects market value weights to be 70% common stock, 15% debt and 15% preferred stock. 28. What is Thompson Corporation's cost of common stock? (3 points) 29. What is Thompson Corporation's WACC? (3 points)

Explanation / Answer

28)

Re = Rf + Beta*(Rm - Rf)

= 4% + 1.3*8%

= 15.4%

29)

Rp = 10/110 = 1/11 = 9.09%

WACC = 70%*15.4% + 15%*8%*(1-35%) + 15%*9.09%

= 12.92%

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