Margo Corporation is a major producer of lawn care products. Its stock currently sells for $80 per share; there are 10.5 million shares outstanding. Margo also has 400,000 bonds outstanding ($1000 face value per bond). These 10-year bonds pay annually, have a current yield of 10% and trade at 90% of face value. The risk free rate is 8%, the market risk premium is 9%, and Margo has beta equal to 2. The corporate tax rate is 34%.
A. Margo is considering expansion of its facilities. Use the SML to determine the cost of equity.
B. Compute the WACC for Margo.