Question - CPA Inc. is considering a project for the coming year that will cost $50,000,000. CPA plans to use the following combination of debt and equity to finance the investment:
- Issue $15,000,000 of 20-year bonds at a price of 101, with a coupon rate of 8%, and flotation costs of 1.5% of par. The after flotation cost yield is 8.08%.
- Use $35,000,000 of funds generated from earnings.
- The equity market is expected to earn 12%. US Treasury bonds are currently yielding 5%. The beta coefficient for CPA is estimated to be .60. CPA is subject to an effective corporate income tax rate of 40%.
Assume that the after-tax cost of debt is 7% and the cost of equity is 12%. Determine the weighted-average cost of capital.