Peet's Coffee is considering a new project. It has a target capital structure of 50% debt, 45% equity and 5% preferred stock. Peet's has noncallable bonds outstanding, with a coupon rate of 8.5% (paid semiannually), that mature in 16 years with a face value of $1,000, and a market price of $985.45. The yield on the company's current bonds is a good approximation of the yield on any new bonds they issue. The company can sell shares of preferred stock that pay an annual dividend of $6 at a price of $35.45.

Peet's has retained earnings they will use to finance their project. They estimate their cost of equity using the CAPM approach. Their beta is 1.4, the risk-free rate is 2.2% and the expected market return is 7.8%. If they have a tax rate of 35.0%, what is the WACC for this project?

Answer rating: 100% (QA)

To calculate the Weighted Average Cost of Capital WACC for Peets Coffees new project we need to dete... View the full answer