Whitley Motors Inc. is in the midst of a transportation revolution. They have the ambition, the talent and the technology to realize the safer, better and more sustainable world. As an open, inclusive company, they're also creating an environment where everyone feels

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welcomed and valued for who they are. Their team brings wide-ranging perspectives and experiences to solve the complex transportation challenges of today and tomorrow. As of today Whitley Motors Inc. has outstanding debt, preferred stock and common stock in the market. The book values for debt, preferred stock and common stock are $500,000, $175,000 and $350,000 respectively. The firm issued 500, 25-year bonds five years ago which were sold at a par value of $1,000. The bond carry a coupon rate of 7% with semi-annual payments, but are currently selling to yield new buyers 10%. It has 3,500 shares of 8% preferred stock which were sold 12 years agoat a par value of $50. They're now priced to yield 11%. There are 7,000 common stocks outstanding that distributed $2.10 dividend last year. Security analysts are projecting that the common dividend will grow at a rate of 15% for the next two years and then the growth rate will drop to 8% a year. Analysts also knows that the market risk premium is 7%, the risk free rate is 6.5% and firm's betais 0.83. Whitley Motors Inc.' marginal tax rate is 35 percent.

a. State the cost of debt

1. State the cost of preferred stock
2. Calculate the cost of common stock
3. Calculate the weighted average cost of capital.
4. Whitley Motors Inc. is planning to introduce a new motor to the market. This is a new

technology and this kind of motors have not been used in the production before. Therefore, this is a riskier investment than the ongoing operations of the firm and WACC of the company should be adjusted. The adjustment factor is up or down by 1.5% (i.e. Adjusted WACC = WACC ± 1.5%). If the cash flows of the project is given in the table then decide if Whitley Motors Inc. should introduce this new motor or not.

Time                   Cash Flows ($)

0-500,000

1125,000

2125,000

3150,000

4150,000

5150,000