Question 4: As a result of new development areas in Western Australia, Coles Group Limited is planning to open a range of new Coles supermarkets. The firm expects they will be able to raise the additional capital required to fund this expansion in the proportions outlined below by their target capital structure. Coles Group Limited's marginal tax rate is 30%. As of today, Coles Group Limited has 8% coupon debentures outstanding, with a par value of $1,000 each and 13 years till maturity. These debentures are currently trading at $1,060. The firm also has $2 dividend preferred stocks outstanding, each with a par value of $22. The current market price of these preferred stocks is $17. Coles Group Limited's common stock has a current market price of $52. The common stock paid a dividend of $3.40 this year, with dividends expected to grow at an annual rate of 8%. In order to raise the additional capital, Coles Group Limited will need to sell new debentures, at a par value of $1,000 each. The issuance costs for each new debenture sold will be $15 per bond. The firm will also issue new $22 par value preferred stocks into the marketplace, which will cost the firm $2.50 per share. Coles Group Limited will also need to sell new common equity, with issuance costs expected to be $3.50 per share issued. Coles Group Limited has the following target capital structure: Source of funds Debt Preferred stock Common equity Total Weight 30% 15% 55% 100% Required: a) What is Coles Group Limited's weighted average cost of capital? Assume new capital is raised in the proportions outlined by their target capital structure. b) Determine which of the developments outlined in the following investment opportunity schedule should be accepted by Coles Group Limited. Please consider the firms WACC as calculated in Part a) and explain why any project/s should be accepted. Development Vasse Estate Placid Waters Ravenswood Green Sienna Wood Net Investment $3,929,500 $2,839,000 $5,230,000 $4,735,000 Expected Return (p.a.) 17% 13% 10% 7%