Barrow Corp. is planning a $20 million expansion to be financed with debt and common stock. The target capital structure is 20% debt and the rest is from equity. They plan to raise funds to match the target capital structure. They have sufficient retained earnings to fund the project. The tax rate is 20%.

• Bonds: They have bonds with 6 years to maturity and a face value of $1000 per bond. The coupon rate is 6.2% and coupons are paid annually. The bonds trade at $1100 per bond. Issue costs are negligible.
• Equity: Barrow has a current dividend of $2.40. The retention rate is 40% and the return on equity is 15%. The price of common stock is $40 per share. Issue costs are $4 per share.

a) Calculate the weighted average cost of capital. Carry work out to 4 decimal places (so your answer is either .xxxx OR xx.xx%)

b) The expansion is expected to produce cash flows of $4.8 million every year for the next 6 years. Use the WACC to find the net present value.

c) Should they expand? Explain.