Question
3. ABC Inc. is considering a major expansion project. You are asked to estimate ABC Inc.s cost of capital for this expansion project. You performed
3. ABC Inc. is considering a major expansion project. You are asked to estimate ABC Inc.s cost of capital for this expansion project. You performed a detailed analysis of ABC Inc. and found the following information.
- This expansion projects risk is comparable to the firms average project.
- ABC Inc. just issued a 30-year 10% semiannual coupon bond for $896.93. The firm falls into the 40% tax bracket.
- The firms preferred stock pays $1 in dividends and sells for $20.
- The firms common stock is priced at $55/share, has a current dividend of $3.25/share, and the dividend is expected to grow at 6% perpetually.
- The firms common stock has a beta of 1.1. Risk-free rate is 2%, and the market return is 11%.
- Bond-yield risk premium = 1.5%
- The firms target capital structure is 20% debt, 10% preferred stocks, and 70% common equity.
- The firm can raise new capitals without flotation costs.
Based on these information, what is your estimate of ABC Inc.s cost of capital for this expansion project? (15 points)
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