Delta Airlines is seeking to purchase a major piece of equipment for $1.5 million. It will cost an additional $300,000, to ship and install the equipment. The equipment will result in annual cost savings of $950,000 over the next 3 years. The asset will be fully depreciated on a straight-line basis over the next 3 years. Delta Airlines then intends to sell the asset at the end of 3 years for $300,000. The equipment purchase is part of a project in which Delta will invest 10% of the assets total cost of acquiring the asset in net working capital which will be recovered at the end of 3 years.

Delta intends to finance the acquisition of the equipment as follows:

• Issue 100,000 common stocks which are currently priced at $8.75 per share. The companys common stock has a beta of 1.5.
• Issue 3,200 6% preferred stock with $100 par value which are currently priced at $125 per share.
• The remainder of the financing will be obtained from the issue of 25-year semiannual 8% $1,000 par value bonds, that would sell at 105%.

Other information:

• The company falls within the 20% tax bracket.
• The risk-free rate is 4% and the expected return on the market is 11.5%.

Questions

What is the projects after-tax cost of debt?