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Q1: During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program that has been proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Daviss cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task: (1) The firms tax rate is 40%.

(2) The current price of Harry Daviss 12% coupon, annual payment, bonds with 15 years remaining to maturity is $1,153.72. Harry Davis does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost.

(3) The current price of the firms 10%, $100 par value, annual dividend, perpetual preferred stock is $116.95. Harry Davis would incur flotation costs equal to 5% of the proceeds on a new issue.

(4) Harry Daviss common stock is currently selling at $50 per share. Its last dividend was $4.19, and dividends are expected to grow at a constant rate of 5% in the foreseeable future. Harry Daviss beta is 1.2, the yield on T-bonds is 7%, and the market risk premium is estimated to be 6%. For the bond yield- plus- risk-premium approach, the firm uses a 4 percentage point risk premium.

(5) Harry Daviss target capital structure is 30% long-term debt, 10% preferred stock, and 60% common equity.

To structure the task somewhat, Jones has asked you to answer the following questions.

What is Harry Daviss weighted average cost of capital (WACC)?

Why is cost of capital calculation important for a company and how can it help the investors?