Question: A. John & Son Canada Corp has the following capital structure. Security 1) 6.0% Bond---30million 2) 5.5% Straight bond ----10 million 3) 7.5% Preferred stock

A. John & Son Canada Corp has the following capital structure.

Security

1) 6.0% Bond---30million

2) 5.5% Straight bond ----10 million

3) 7.5% Preferred stock ----10 million

4) Common stock -----50 million

Total $100 million

The 6% bond is a callable bond and yield to call (YTC) of this bond is 6.75%. The straight bond which has a coupon rate of 5.5% has a yield of 6.45%. The preference share of John & Son is currently trading at $95. The common stock of John & Son Canada Corp has a beta of 1.25. The T-bill rate is 2% and the return on the TSX composite index is 9%. The corporate tax rate is 35%.

i) Compute the cost of capital after tax for each source of financing (capital)? [6 marks]

ii) What is its WACC?

iii) If John & Son Canada Corp is evaluating an investment proposal that provides an internal rate of return (IRR) of 12%, should the company go with the proposal assuming that the WACC remains constant?

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