Wilson Electric is planning a $100 million expansion. This expansion will be financed, in part with debt issued with a coupon interest rate of 8.27%. The bonds have a 20-year maturity and a $1000 face value, and they will be sold to net Wilson Electric $996 after issue costs. Wilson Electric’s marginal tax rate is 40%.
Preferred stock will cost Wilson Electric 12% after tax. Wilson Electric’s common stock pays a dividend of $2 per share. The current market price per share is $25, and new share can be sold to net $24 per share. Wilson Electric’s dividends are expected to increase at an annual rate of 5% for the foreseeable future. Wilson Electric expects to have $20 million of retained earnings available to finance the expansion.
Wilson Electric’s target capital structure is as follows:
Debt 25%
Preferred Stock 10%
Common Equity 65%
Calculate the weighted average cost of capital that is appropriate to use in evaluating this expansion program.
A. 10.25%
B. 11.31%
C. 12.08%
D. 13.17%