Question
Sawchuk Company is considering an important capital project it will raise external capital to finance. The firm is financed in part by equity investors and
Sawchuk Company is considering an important capital project it will raise external capital to finance. The firm is financed in part by equity investors and in part by rolling over $500 million par value of 10-year annual bonds on which it pays interest totaling $30 million per year. Each bond has a face value of $1,000. The flotation costs for a new bond issue would be 1% of the total proceeds. Over the past decade, the firm has maintained an average compound growth rate of 4.2% in its dividends, a rate analysts expect it can maintain. This year, each common share received a total of $3.00 worth of dividends. These shares are trading at $50 but the net proceeds from issuing new shares would be only $48.50 each (floatation costs are $1.50/share). Sawchuk presently has 8,000,000 common shares outstanding. Finally, Sawchuk's investment bankers estimate that new preferred shares providing a $2 annual dividend could be issued to investors at $24 per share to 'net' Sawchuk $22 per share issued (after flotation costs). The firm already has 1,000,000 of these preferred shares outstanding. Its tax rate is 20%. Sawchuk's preferred shares are trading at $24, its bonds at $950 and common shares at $50.
Assuming Sawchuk can borrow at the same rate its debt is currently financed at, calculate its after-tax weighted average cost of capital (WACC)
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