A company wishes to raise funds million from a bank at 6% per year cora project

Question

A company wishes to raise funds million from a bank at 6% per year cora project common stock. The stock price is 15 d share (ignore growth effects). Retainars per share eeds 12 million. It decides to borrow 4 nthly. It will issue 3 million worth of re with annual earnings of 75 cents per 2. it mo a bond issuing with a quarterly dividen 96. arnings will be us etained Earninnd page used for 2 million. The last 3 million will ent and 6% annual rate. The effective tax rate for the company is 38%. What is the weighted average cost of capital for this project?

Explanation / Answer

Cost of Equity, Ke = Annual Earnings/Stock Price = 0.75/15 = 5%

Proportion of Equity , We = (3+2)/12 = 0.4166

Cost of Debt = 6%

Post tax cost of debt = 6%*(1-38%) = 3.72%

Total Debt raised = 4+3 = 7 M

Proportion of debt = 7/12 = 0.5833

WACC= Kd* Wd + Ke * We = 3.72%* 0.5833 + 5%* 0.4166 = 4.25%

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