Suppose stock in Wesley Corporation has a beta of 0.90. The market return is 11 percent, and the Treasury Bill rate is 5 percent. Wesleys last dividend was 1.40 per share, and the dividend is expected to grow at 6 percent indefinitely. The stock currently sells for 47 per share. Wesleys target capital structure is 1/3 debt and 2/3 equity. Its cost of debt is 10 percent before taxes. Its tax rate is 25 percent.

a. What is Wesleys cost of equity capital? Assume that you equally believe in the CAPM approach and the dividend growth model.

b. What is Wesleys WACC?

c. Wesley is seeking 20 million for a new project. The necessary funds will have to be raised externally. Wesleys flotation costs for selling debt and equity are 3 percent and 14 percent, respectively. If flotation costs are considered, what is the true cost of the new project?

d. Under what circumstances would it be appropriate for Wesley Corporation to use different costs of capital for its different operating divisions? What are two techniques you could use to develop a rough estimate for each divisions cost of capital?