The Hanover based company, We Know Capital Limited (WKC), has been hired as consultants by a large logistics company. As an employee of WKC, you have been assigned the responsibility of analysing the weighted average cost of capital of the company. The relevant details are as follows: Value of Common Stock $750,000 Value of Preferred Stock $450,000 Value of Debt $1,300,000 Beta 2.49 Dividend Rate for Preferred Stock 8.5% Par Value of Preferred Stock $100 Price of New Preferred Stock $68 Yield To Maturity for Bonds 12% The risk-free rate is currently 4%, the average market return is 12% and the corporate tax rate is 25%. i) Calculate the cost of each capital structure component. (8 marks) ii) Determine the weighted average cost of capital. (6 marks) b) Robinson & Company Ltd. (RCL) has the following capital structure: 40% Debt and 60% common equity. The after-tax cost of debt is 8% and the cost of common equity is 15%. i) Given that the tax rate is 30%, what is the weighted average cost of capital? (4 marks) ii) RCL is considering a project with an internal rate of return of 15%. Based on the WACC calculated in part (i) above, should they accept this project? Explain. (4 marks) iii) How would the cost of capital be impacted by a decision to increase the amount of common equity to 85% and reducing the amount of debt to 15%? Explain without calculations. (3 marks) Answer text