J. Ross and Sons Inc. has a target capital structure that requires 50 percent debt and 50 percent common equity. The company's only interest-bearing debt is a 10-year bond. The company's 10-year long-term bonds pay a semi-annual coupon of 8% (that is, 4% of the principal will be paid every six months) and the bonds are currently selling for $1,200 and the bond par is $1,000. The company can issue bonds for only $10 million at this price. Beyond this amount, the company can issue the bond at the same price, but the company has to pay a semi-annual coupon of 9% (ie, 4.5% of the principal will be paid every six months). Ross expects retained earnings of $15 million. Ross common shares currently sell for $30 per share, but if the company issues new common shares, the company has to pay 10% of the floatation costs. The company will pay an upcoming dividend of $2 (D ₁ = $2.00) per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 6 percent per year. The business tax rate is 30%.

The company has a very lucrative new project and it requires $35 million. What should the WACC be for this project? To answer the question, you need to calculate debt break points and retained earnings.

Answer rating: 100% (QA)

To calculate the Weighted Average Cost of Capital WACC for the new project we need to consider the cost of both debt and equity based on the given information Lets break down the steps to find the WAC... View the full answer