Problem #2 (10 Marks) Below is a partial balance sheet for Thompson Transportation. The existing preferred shares are currently selling for $25 per share. The firm can sell new $100 par value preferred shares with a 12% annual dividend. The market price is expected to be $95 per share. Liabilities & Shareholders' Equity Bonds, coupon =9%, paid semi-annually (maturity 15 years, $1,000 face value) $10,000,000 Preferred Stock (Par value $20 per share) 2,000,000 Common Stock (1,000,000 shares outstanding) 10,000,000 Retained Earnings 28,000,000 Total $50,000,000 a) Calculate the cost of preferred shares (Rp). b) Calculate the WACC for Thompson Transportation given the following additional information: Market value of debt = $10,240,000 Cost of Debt = 4.15% Market value of Common Stock = $18,000,000 Cost of common equity = 16.32% Effective tax rate = 40% Problem #2 (10 Marks) Below is a partial balance sheet for Thompson Transportation. The existing preferred shares are currently selling for $25 per share. The firm can sell new $100 par value preferred shares with a 12% annual dividend. The market price is expected to be $95 per share. Liabilities & Shareholders' Equity Bonds, coupon =9%, paid semi-annually (maturity 15 years, $1,000 face value) $10,000,000 Preferred Stock (Par value $20 per share) 2,000,000 Common Stock (1,000,000 shares outstanding) 10,000,000 Retained Earnings 28,000,000 Total $50,000,000 a) Calculate the cost of preferred shares (Rp). b) Calculate the WACC for Thompson Transportation given the following additional information: Market value of debt = $10,240,000 Cost of Debt = 4.15% Market value of Common Stock = $18,000,000 Cost of common equity = 16.32% Effective tax rate = 40%