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PRACTICE QUESTION:

Calculate the WACC which represents the hurdle rate" for a typical project with average risk using average of the range of the marginal cost of common equity using retained earnings or new earnings. Data: A 15-year, 12% coupon, semiannual payment non-callable bonds sell for $1,153.72. New bonds will be privately placed with no flotation cost. A 10%, $1,000 par value, annually dividend, perpetual preferred stock sells for $1,111. Both an existing common stock and a new common stock issue, which incurs no flotation cost of the proceeds, sells for $50. D = $4.3995 and g = 5%. b = 1.2; r = 7%; RP = 6%. - 1 RF M Bond-Yield Risk Premium = 4%. - Target capital structure: 30% debt, 20% preferred, 50% common equity. Tax rate is 25%. HINTS: Use the formula, WACC = = wd x rd x (1 Tax) + wp x rp + We X rs