Question
he Ewing Distribution Company is planning a $160 million expansion of its chain of discount service stations to several neighboring states. This expansion will be
he Ewing Distribution Company is planning a $160 million expansion of its chain of discount service stations to several neighboring states. This expansion will be financed, in part, with debt issued with a coupon interest rate of 12 percent. The bonds have a 15-year maturity and a $1,000 face value, and they will be sold to net Ewing $980 after issue costs. Ewings marginal tax rate is 40 percent. Preferred stock will cost Ewing 17 percent after taxes. Ewings common stock pays a dividend of $5 per share. The current market price per share is $16, and new shares can be sold to net $15 per share. Ewings dividends are expected to increase at an annual rate of 8 percent for the foreseeable future. Ewing expects to have $40 million of retained earnings available to finance the expansion. Ewings target capital structure is as follows:
Debt | 20 | % | |
Preferred stock | 20 | ||
Common equity | 60 |
Calculate the weighted cost of capital that is appropriate to use in evaluating this expansion program. Use Table II and Table IV to answer the questions. Round your answer to one decimal place.
%
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started