You would like to start your own remodeling company. To see if that is a good idea from a financial point of view, you need to calculate the NPV of the project. You have estimated different costs related to the project, but you don't know what the cost of capital for the project is. You would like to use the firm's weighted average cost of capital (WACC), but since the company does not exist yet, you don't have that information. So you decide to use the information for R&R instead, a public company that operates exclusively in the remodeling industry. Here is the data you collected on R&R today: 

 

•There are three (3) sources of financing: common stock, preferred stock, and a loan. There are 12,000 common shares outstanding, 5,000 preferred shares, and one (1) loan that matures in 5 years. 

 

•The interest rate on the loan is 9.5%. The remaining balance is $324,360. 

 

•The preferred stock pays quarterly dividends of $5.5. The cost of preferred stock is 11%. 

 

•The price of common stock is $42.29. The analysts think that the cost of common stock is equal to 1.5 times the cost of preferred stock. 

 

•The tax rate paid by by R&R is 35%.

 

What cost of capital should you use to calculate the NPV of the remodeling business?

Answer rating: 100% (QA)

To calculate the cost of capital for the remodeling business we can use the weighted average cost of ... View the full answer