You have recently been hired as a financial analyst at Granite Ltd. your first task is to calculate the companys weighted average cost of capital (WACC). Your new boss, the VP of Finance has given you the following information:

Bond outstanding 6.5% coupon

Common stock price $74.00

Preferred stock price $70.00

Expected common dividend $2.20

Preferred dividend $8.50

Historical growth rate 9.2%

Expected growth rate 12%

Corporate tax rate 30%

Floatation costs 3%

You have been told that the optimal capital structure for the firm is:

• Debt 40%
• Preferred 10%
• Equity 50%

Through your preliminary work you know that bonds of equal risk to the companys are currently yielding 7.5%.

Make sure to show ALL work:

1. (5 marks) Calculate the firms weighted average cost of capital (WACC).
2. (1 mark) What would happen to the firms WACC (increase/decrease) if the companys tax rate increased. Explain your response.
3. (1 mark) What would happen to the firms WACC (increase/decrease) if there was a rally in bond prices. Explain your response.
4. (3 marks) The company is considering a major acquisition, and one of your co-workers cites the large cost difference between debt and equity, and suggests the acquisition be financed entirely by debt due to its significantly lower cost. Do you agree? Or disagree? Explain your response.