The following information relates to the capital structure current in place for Etana Inc.

• Longterm deb(8.5% yield to maturity)-$22,000.00
• Preferred shares($150 par value, $16.50 annual dividend)- $45,000.00
• Common shares (550,000 shares outstanding)

Currently, Etana Inc. can raise long term debt at an annual interest rate of 7.5%. The current market prices of Etana Inc.'s shares are $170 per preferred and $70 per common share. Common dividend per share is $6.50 and is expected to grow at a rate of 2.5% per year.

Required

1. Assuming the current capital structure will remain constant and that Etana Inc. has an income tax rate of 40%, what is the weighted average cost of capital that Etana Inc. should use to appraise this investment opportunity.
2. Briefly discuss two items that may affect the discount rate when considering investment appraisal.