Directions

Please show all appropriate steps on each problem.

Problem 3: Your firm’s

Question

Directions: Please show all appropriate steps on each problem.

Problem 3: Your firm’s

capital structure consists of 30% debt, 60% common stock, and preferred stock. The firm is planning to issue new debt to fund a project. The debt is priced at $1,010 per bond and pays interest semi-annually. The bonds have ten years to maturity and pay an 8% coupon rate. The bonds have a $1,000 par. Goldman Sachs will charge the firm 8% to prepare the bond issuance. The firm has a beta of 1.78, and the SP return is currently 6%. Treasury bills currently yield 1.45%. The firm’s preferred stock pays a perpetual preferred dividend of $3, and the preferred stock is currently trading at $40 per share. The firm is in the 32% tax bracket.

A. What is the firm’s weighted average cost of capital?

B. The firm is looking at three mutually exclusive projects. Project A has an expected return of 9%. Project B has an expected return of 12%. Project C has an expected return of 15%. Which project(s) should the firm choose and why?

Finance