Question 3 (20 marks) You are employed by Play Co, a firm specialises in producing safety surfacing for children's playgrounds. You are on the corporate staff as an assistant to the Vice-President of Finance. The Vice-President of Finance is considering investing in equipment that would allow the company to manufacture a new type of safety surfacing. Your boss has asked you to estimate the weighted average cost of capital for the company for evaluating the new proposal. Following are balance sheets and some information about Play Co. Assets Current assets Net plant, property, and equipment Total Assets Liabilities and Equity Accounts payable Accruals $28,000,000 $146,000,000 $174,000,000 $10,000,000 $9,000,000 Current liabilities $19,000,000 Long term debt (50,000 bonds, $1,000 face value) Total liabilities $50,000,000 $69,000,000 Preferred stock (50,000 shares, 10% $100 par value) $5,000,000 Common stock (30,000,000 shares) $60,000,000 Retained earnings Total common equity $40,000,000 $100,000,000 Total liabilities and equity $174,000,000 You check the stock market and see that Play Co stock is currently selling for $6.50 per share and that Play Co bonds are selling for $1,167.40 per bond. These bonds have an 8.25% annual coupon rate, with semi-annual payments. The bonds mature in ten years. The last dividend paid to the common stock was $0.5, and dividend are expected to grow at an annual rate of 6%. For the bond-yield-plus-risk-premium approach, the firm uses a risk premium of 8.35%. The current price of the firm's preferred stock is $105. The beta for your company is approximately equal to 1.3. The yield on a 20-year Treasury bond is 5%. The expected return on the stock market is 12%. The tax rate is 20%. Required: a. b. C. Estimate the after-tax cost of debt and cost of preferred stock for Play Co. (3 marks) Using different approaches, estimate the cost of equity for Play Co. (6 marks) Calculate the market value weighted average cost of capital and the book value weighted average cost of capital for Play Co and comment briefly on any difference between the two values and the impact on evaluation new investment proposal. (You can use the average of the different approaches for calculating the cost of equity.) (11 marks)