Question 1: Given the following data for El Pollo Loco Inc:
a) Calculate its weighted average cost of capital (WACC).
Percent of capital structure:
Debt 35%
Preferred stock 10%
Common equity 55%
Additional Information:
Bond coupon rate 11%
Bond yield to maturity 9%
Dividend, expected common $ 2.50
Dividend, preferred $ 7.00
Price, common $ 45.00
Price preferred $ 100.00
Flotation costs, preferred $ 5.00
Growth rate 8%
Corporate tax rate 35%
b) What would be the WACC if the tax corporate rate increases to 45%?
c) What are the implications of the changes in part B) for investing in capital projects?
Question 2: In general terms, why is the effective cost (cost to company) of debt less than the cost of common stock if both securities were priced to yield (return to the investor) 10 percent in the market?