Question
GM is considering investing in a new plant that will save the company $20 million each year thereafter, to value this project they must calculate
GM is considering investing in a new plant that will save the company $20 million each year thereafter, to value this project they must calculate the WACC of the firm. Assume the market value of GM's equity, preferred stock, and debt are $6 billion, $2 billion, and $13 billion, respectively. GM has a beta of 1.7, the market risk premium is 8%, and the risk-free rate of interest is 3%. GM's preferred stock pays a dividend of $4 each year and trades at a price of $30 per share (hint: use the perpetuity formula). GM's debt trades with a yield to maturity of 8.0%. (Tax rate is 35% for this problem)
a. Calculate the costs of capital from equity, debt, and preferred stock.
b. Calculate the capital structure weight for each source of capital.
c. What is GM's (after tax) weighted average cost of capital?
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