Assignment 2

Q14.

QUESTION 14

1. Cinnamon Corp. plans to finance a new $16 million project with 20% in bonds, $4M in preferred stock and the rest in retained earnings.

   • The 5% annual coupon bonds have a 5-year life and a price of $940. Face value is $1000.
   • The preferred stock has a $2.70 annual dividend. The preferred stock has a price of $33 but issue costs are $3 per share.
   • The Treasury bill rate is 3% and the market risk premium is 9%. The common stock has a beta of 1.25. The tax rate is 25%.

   a. Find the weighted average cost of capital (WACC).

   b. The government announces that only 10% of the interest expense is now tax deductible. They also announce a reduction in the tax rate to 20%. What is the impact on the WACC?