Question 4: Ohio Valley Power Company has engaged your services as a financial analyst to estimate their cost of capital for use in evaluating future capital investment opportunities. The company's intended future capital raisings are reflective of their target capital structure. The company is planning to raise $50 million from the sale of long-term debt instruments. These $1,000 par value long-term debentures are expected to net the company $870 each after issuance costs. In return these debentures will offer bondholders a 10% coupon rate with 15 years till maturity. The company's marginal tax rate is 40%. Ohio Valley Power Company is also able to issue $20 million preferred stock. The new preferred stock issuance is expected to be sold at a price of $25 per share. The cumulative preferred stock dividend will be set at $2.75 per annum, with issuance costs expected to be $1 per share. The company currently has $30 million of retained earnings available for future capital investments If required, the company could raise additional common equity capital from the sale of new shares. Ohio Valley Power Company's common stock currently has a beta of 0.8092, with the risk-free return and expected return of the market portfolio being 6.5% and 16% respectively. The company's share price is currently $40 per share, and the current common stock dividend of $3.50 is expected to grow at a rate of 5% into perpetuity. New shares could be sold to net the company $35 each after issuance costs. a) Calculate the company's weighted average cost of capital (WACC). [6 marks) Please provide your answer inside this textbox: Question 4: Ohio Valley Power Company has engaged your services as a financial analyst to estimate their cost of capital for use in evaluating future capital investment opportunities. The company's intended future capital raisings are reflective of their target capital structure. The company is planning to raise $50 million from the sale of long-term debt instruments. These $1,000 par value long-term debentures are expected to net the company $870 each after issuance costs. In return these debentures will offer bondholders a 10% coupon rate with 15 years till maturity. The company's marginal tax rate is 40%. Ohio Valley Power Company is also able to issue $20 million preferred stock. The new preferred stock issuance is expected to be sold at a price of $25 per share. The cumulative preferred stock dividend will be set at $2.75 per annum, with issuance costs expected to be $1 per share. The company currently has $30 million of retained earnings available for future capital investments If required, the company could raise additional common equity capital from the sale of new shares. Ohio Valley Power Company's common stock currently has a beta of 0.8092, with the risk-free return and expected return of the market portfolio being 6.5% and 16% respectively. The company's share price is currently $40 per share, and the current common stock dividend of $3.50 is expected to grow at a rate of 5% into perpetuity. New shares could be sold to net the company $35 each after issuance costs. a) Calculate the company's weighted average cost of capital (WACC). [6 marks) Please provide your answer inside this textbox
