Question
The Big Easy Inc. target capital structure calls for 30% debt, 10% preferred stock, and 60% common equity. It has outstanding 25-year noncallable bonds with
The Big Easy Inc. target capital structure calls for 30% debt, 10% preferred stock, and 60% common equity. It has outstanding 25-year noncallable bonds with a face value of $1,000, a 9% semi-annual coupon, and a market price of $1,187.66. The tax rate is 40%. The companys preferred stock currently trades at $65 and pays a $5 annual dividend per share. The companys common stock, on the other hand, currently trades at $35 a share and just paid $4.56 annual dividend per share. The dividend is expected to grow at a constant rate of 3% a year. In addition, the risk-free rate is 6%, the average return on the market is 10%, and the firms beta is 1.5. Given the following information, answer the following questions:
- What is the flotation cost adjustment?
- What is the cost of external equity?
- Calculate the WACC if the common equity comes from retained earnings.
- Calculate the WACC if the common equity comes from new stocks.
- If the company is considering the following capital budgeting projects:
Project Size Rate of Return
A $1M 13%
B $2M 12.5%
C $2M 12%
D $2M 11.9%
E $1M 11%
F $1M 10.56%
G $1M 10%
Which set of projects should be accepted?
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