Question
DragonFlights, Inc. is planning on purchasing a new flying dragon for their new route to Volantis. The cost of the dragon is $10.5 million .
DragonFlights, Inc. is planning on purchasing a new flying dragon for their new route to Volantis. The cost of the dragon is $10.5 million. On average the dragons are operational for about 10 years. They believe that the new route will produce them positive operating cash flows of $2,550,000 per year for the next 10 years.
DragonFlights is currently financed with equity and debt. They have 1 million shares outstanding and shares are trading at a price of $125 per share. Stock beta is 2.4 as dragon flying business is a risky business. Company also has bonds outstanding in the total amount of $50 million in book value. Bonds are trading at discount at 85% of par or in other words at 15% below par value of $1,000. Bonds have 15 years to maturity and have a coupon rate of 12% per year, with coupon paid semi-annually. Bonds have a face value of $1,000. Current risk free rate is 3% and market risk premium is 6.5%. Marginal tax rate is 22%.
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Given your calculated cost of equity and cost of debt, what is the cost of capital (WACC) for DragonFlights Inc.?
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