The Manchester 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 $1,000,000

Value of Preferred Stock$400,000

Value of Debt $600,000

Beta 2.18

Dividend Rate for Preferred Stock 4.5%

Par Value of Preferred Stock $90

Price of New Preferred Stock $50

Yield To Maturity for Bonds 7%

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: 25% Debt and 75% common equity. The after-tax cost of debt is 15% and the cost of common equity is 25%.

i) Given that the tax rate is 25%, what is the weighted average cost of capital? (4 marks)

ii) RCL is considering a project with an internal rate of return of 25%. 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)