ABC, Inc. is looking at raising additional capital for the future project. The project is expected to provide a return on investment of 13%. In order for ABC, Inc. to determine whether this project is worth investing in, it must first determine the cost of capital it will use to finance the project.
a. The firm's current stock price is $45 and it has 4 million shares of stock outstanding. The firm also has $30 million of preferred stock and $70 million of debt. Calculate the weights of each capital component.
b. The firm is looking at issuing a new 30-year bond that pays an annual coupon of 8% with a flotation cost of 2%. The bond is expected to sell at its par value of $1000. The firm's tax rate is 40%. Calculate the ATrd.
c. The firm will have to pay the underwriter a 10% flotation cost for the new equity it will raise. The firm just paid out a dividend of $4.22 with an expected growth rate of 4.5%. Calculate the re
d. The firm expects its preferred stocks to sell for $112.55. The par value of the preferred stock will be $100 with a 12% annual dividend. The flotation cost will be paid to the underwriter will be 4%. Calculate the rps.
e. Assume that the firm's current market value is their target capital structure, what is the firm's WACC?
f. Should the firm take on this investment based on the cost of the capital that it will use to fund the project? Why?