Question
General Electric Inc., is estimating its cost of capital. GE is currently carrying a 10-year $1,000 par bond with coupon rate of 6.5% coupon is
General Electric Inc., is estimating its cost of capital. GE is currently carrying a 10-year $1,000 par bond with coupon rate of 6.5% coupon is currently sold for $865. GE's beta is 1.1, the risk-free rate is 3% and market expected return is 13; GE's preferred stock is currently sold for $90 and its divident is $8.2 per share and its target capital structure is 30% debt, 20% preferred stock, and 50% common equity. GE's tax rate is 23%;
a) What is the company's cost of bond? b) What is the company's cost of preferred stock? c) What is the company's cost of equity? d) What is the company's weighted average cost of capital? e) There are two average risk projects that GE is considering: A with expected return of 10% and B with the expected rate of return of 12.2%. Do you choose any of these projects? Why?
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