LilyMac Studios, a national chain of photography studios, is considering opening up a chain of coffee shop/art

Question:

LilyMac Studios, a national chain of photography studios, is considering opening up a chain of coffee shop/art galleries. While the existing operations of the firm have a beta of 1.17, the new chain is expected to have a beta of 0.8.

LilyMac currently has 500,000 shares of common stock outstanding, which are selling for $63.72 per share, and a $10 million dollar bond issue, selling at 104 percent of par. The expected market risk premium is 6 percent, and the current risk-free rate is 5.5%. The bonds pay an 8 percent semiannual coupon and mature in 20 years.

LilyMac's next expected dividend is $4.00 per share, and future dividends are expected to grow at 4% per year.

The current operations of the firm produce EBIT of $18 million per year, and the chain's operations are expected to add only $25 million per year to that. The new chain will be funded with 65% percent equity and 35% debt, and estimated flotation costs are expected to be 12 percent and 5 percent, respectively.

What should be the WACC for the new chain of coffee shops?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...