Selma\'s Sushi is trying to decide whether to invest in a new line of business s

Question

Selma's Sushi is trying to decide whether to invest in a new line of business selling premade sushi in the refrigerated section at grocery stores. Assume that their capital structure consists of 38% common stock, 12% preferred stock, and 50% debt. Further, analysts predict that their future cost of debt will be 4% and their cost of preferred stock is 11%. We also know that the current price of common stock is $26 and that the common stock is expected to pay a $1.50 dividend each year. The firm's tax rate is 22%. What is this firm's WACC?

6.92%

5.07%

None of these

5.77%

5.51%

6.92%

5.07%

None of these

5.77%

5.51%

Explanation / Answer

Ans WACC = 5.07%

Investment Cost After tax Cost Average Cost Debt 50% 4% 3.12% 1.56% Common Stock 38% 5.77% 5.77% 2.19% Preferred Stock 12% 11% 11.00% 1.32% 100% Total Cost 5.07% WACC = 587800 / 7900000 * 100 5.07% P0 = Price of Share D1 = Dividend Ke = Cost of Equity P0 = D1 / Ke 26 = 1.50 / Ke Ke = 1.50/26 * 100 Ke = 5.77%

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