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METRA is considering building a new train line from Chicago to Utopia. Use the following information to help Metra determine their cost of capital to
METRA is considering building a new train line from Chicago to Utopia. Use the following information to help Metra determine their cost of capital to assess the project:
- Debt totals $150 million with a 5% coupon, and was just issued (YTM = 5%), but at a premium of 2%
- Common stock (14 million shares outstanding) now trade at $25 per share
- The common stock will pay an annual dividend of $1.20 this year, and is growing at 3% per year
- METRA pays a corporate tax rate of 21%.
- The risk-free rate is 3%, the excess market return is 9%
- Metras common stock Beta is 1.4
- What debt and equity weights will Metra use to calculate WACC?
- What is METRAs cost of debt?
- What is METRAs cost of common equity?
- What is METRAs WACC?
- Under what circumstances would it make sense for METRA to make the investment if it returns less than their cost of capital (WACC)?
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