Consider the following firm's capital structure based on its market value.
Market Value Capital Structure
Bonds, coupon = 9% paid semi-annually, $10.4 million
issued at par value.
Preferred stocks (par value = $10) $1.05 million
Common stocks (par value = $2) $21million
Total $32.45 million
The bonds were issued 3 years ago with a maturity of 15 years and they are selling at $1040 in the current market.
The preferred stock is currently traded at $15 and pays a dividend of $2 per share.
The common stock is currently selling for $21 and its dividend is $1.5 per share.
The common stock's dividend is expected to grow at a constant rate of 3%. The marginal tax rate of the firm is 35%.
Q1. Find the firm's WACC.
Q2. Suppose that the firm is considering taking a 2-year project that costs $2 million. In order for this project to be acceptable, what should the minimum (annual) cash flow generated by this project be? Assume that the project has the same risk as the firm has.