Company Alpha (CA) expects $50 million this year for expansion and will use the same capital structure.
Company Alpha consist of capital structure that has preferred stock of $100 million, debt of $150 million, and common stock of $250 million, and it considers this to be the target capital structure.
CA issue new 20 year, $1,000, 8% coupon bonds to investors at a price of $1,091.
Its common stock is currently selling at $40 per share.
Expected growth in dividends is 6% and expected dividend in the next period is $5 per share.
Preferred stock is priced at $18 per share, and pay a dividend of $2.50 each year.
CA expects to pay a tax of 30% in the following years.
a) Calculate the relevant cost of each source of financing.
b) Calculate the weighted average cost of capital for CA.
c) If the internal rate of return on the expansion project is 14%, should CA raise this capital and invest in the venture. Please Explain.