You are a new intern at Wingate Weather Corp (WWC), a Canadian manufacturer of weather stations. The company is considering the purchase of new equipment and needs your help to calculate the weighted average cost of capital. You have been provided with the firm's most recent financial statements as well as the following additional information:

 You have gathered the following information for the company:
 
Debt: The bonds are currently selling at a quoted price of 102.4 and mature in 15 years. New debt would be issued at par ($1,000) with flotation costs of 2.5%
Preferred Shares: The existing preferred shares are currently selling for $25 per share. WWC can sell new $100 par value preferred shares with a 12% annual dividend. The market price is expected to be $95 per share. Flotation costs for new preferred shares are estimated at 3%.
Common Equity: WWC's common shares currently sell for $18 per share. WWC does not have enough cash on hand to finance the equity portion of the projects. WWC has a tax rate of 40% and a beta of 1.79. You have observed the following from the market: an 8% market risk premium and a 2% risk free rate. Flotation costs for new common shares are estimated at 5%.
The planned equipment purchases have a total capital cost of $480,000 with shipping costs for of $20,000. The present value of the after-tax operating cash flows will be $389,044, the present value of the CCA tax shield will be $107,776, and the present value of ending (terminal) cash flows will be $19,998.
a)    Calculate the cost of debt.
b)    Calculate the cost of preferred stock.
c)    Calculate the cost of common equity.
d)    Calculate the market value weights.
e)    Calculate the discount rate the firm should use to evaluate projects with the same level of risk as the firm.
f)     Would this expansion create value for WWC? Perform a NPV analysis. Assume the asset class will remain open.

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Assets Cash & short-term securities $15 Accounts Receivable Inventories Plant & Equipment Total 9 6 35 $65 Wingate Weather Corporation $millions Liabilities & Shareholders' Equity Bonds, coupon = 9%, paid semi-annually $10 (maturity 15 years, $1,000 face value) Preferred Stock (Par value $20 per share) 2 Common Stock (1,000,000 shares outstanding) 10 Retained Earnings 43 Total $65 Assets Cash & short-term securities $15 Accounts Receivable Inventories Plant & Equipment Total 9 6 35 $65 Wingate Weather Corporation $millions Liabilities & Shareholders' Equity Bonds, coupon = 9%, paid semi-annually $10 (maturity 15 years, $1,000 face value) Preferred Stock (Par value $20 per share) 2 Common Stock (1,000,000 shares outstanding) 10 Retained Earnings 43 Total $65

Answer rating: 100% (QA)

Lets begin by calculating each component of the Weighted Average Cost of Capital WACC as requested a Calculate the cost of debt The cost of debt is the aftertax yield to maturity on the firms debt Sin... View the full answer