Rogers Communications is considering a massive project with hopes of renovating the Rogers Centre, home to the Toronto Blue Jays. Estimated Renovation costs are approximated at $250 million. It has been estimated that the renovations and additions would lead to an increase in revenue of $30 million in the first year of completion. Modest estimates are that the increased revenue would continue to increase by 10% per year for 10 years at which time it would cap-off and plateau. You have been hired to consult management on the viability of such a project. Using the following information for Rogers Communications determine whether they should undertake this project.

Rogers Communications currently has the following Capital Information:

Total Outstanding Bonds = 50,000 bonds with a $1,000 par value and 6% coupon rate. The bonds have 15 years until maturity. They pay interest semi-annually. Current yields on bonds are 4% because of economic policy to combat the effects of the struggling economy. In Canada the Corporate Tax Rate is 26.5%

Rogers issued Preferred Stock when the Rogers Centre was originally built. There are 1.5 million shares of $100 par value stock with an 8% dividend. Right now, the stock is selling for $122/share. The option exists to issue new Preferred Stock. The Investment Bank they will use to underwrite the offering charges 10%.

Common Stock for the company just paid a dividend of $1.92/share. The dividend has been increasing each year by 2%. There are 8 million shares of Common Stock outstanding with a current price of $70. Rogers would prefer to avoid issuing new Common Stock. However, if they do a secondary offering of stock, they will be charged 15% by the underwriter.

Rogers Communications is a telecommunications company. They have a Beta of 0.33. The Expected Return on the Market during the last several years has average 7.82% with a Market Risk Premium of 4.07%.

Management is hesitant to take on a big project like this because they worry that they will not be paid back within their desired 5-year time range. They are looking to you for guidance on what they should do. The CEO of the company was talking to his grandson that runs a hedge fund. His grandson told him that if the Return is less than 15% then it is a bad investment and Rogers Communication would be better off by giving him the $250 million to invest for them.

Calculations

a) What is the weight proportion of the Preferred Stock?

b) What is the weight proportion of the Common Stock?

c) What is the after-tax cost of the Debt?

d) What is the cost of the Preferred Stock?

e) What is the cost of the Common Equity if internally generated? (Use CAPM)