In financing its $200M project, Lee Corp. issues $30M par value of preferred stocks, $60M par value of long-term debt, and finances the balance with common stocks that have a stock beta of 1.10. Its 20-year 9% annual coupon paying bonds are priced at 105% of the par value. Its preferred stocks have a 6% annual dividend rate on a par value of $50, and are priced at $54 per share. Assume that the capital market is pricing all financial securities at their respective fair values, and the risk free return and the market risk premium are, respectively, 2% and 10%.
a) Compute the current yield and the capital gain yield of this bond issue.
b) Compute the weighted average cost of capital (WACC), which is based on the market values of financial securities issued, for Lee Corp. assuming that the marginal corporate tax rate is 35%.
c) The flotation costs for raising new debt capital, preferred stock capital and equity capital are, respectively, 3%, 6% and 15%. Besides, this $200M project is expected to generate a NPV of $19M without accounting for the flotation costs. Compute the weighted average flotation cost, and the NPV of this project after taking into account of the flotation costs.