Answer:

7. METRA is considering building a new train line from Chicago to Utopia. Use the following information to help Metra determine their cost of capital to assess the project: _{12 pts) Debt totals $150 million with a 5% coupon. Issued four years, it is now trading at 102 Common stock (14 million shares outstanding) now trades at $25 per share The common stock will pay an annual dividend of $1.20 this year, and the dividend is expected to grow by 2.5% annually METRA pays a corporate tax rate of 21%. The risk-free rate is 2%, the excess market return is 7% Metra's common stock Beta is 1.4 a. What debt and equity weights will Metra use to calculate WACC? (3 pts) b. What is METRA's cost of debt? (3 pts) C. What is METRA's cost of common equity? (3 pts) d. What is METRA's WACC? (3 pts) e. Under what circumstances would it make sense for METRA to make the (2 pts) investment if it returns less than their cost of capital (WACC)