Question
Woolworths is considering a new project. The company has a debt-equity ratio of 0.60. All debt is in the form of 30-year bonds with an
Woolworths is considering a new project. The company has a debt-equity ratio of 0.60. All debt is in the form of 30-year bonds with an 8% per annum coupon rate. These bonds are currently selling at par. The company is in a 40% marginal tax bracket.The company has just paid a dividend of $4. The dividends are expected to grow at the rate of 1% forever. The current market price of Woolworths common stock is $50. The firm believes that the project is riskier than the company as a whole and that it should use an adjustment factor of +1.5%. What is the WACC it should use for the project under a classical tax system?
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