ABC’s CFO is considering whether to take on a new project that has average risk. He collected the following information:
• The company has bonds outstanding that mature in 26 years with an annual coupon of 7.5 percent. The bonds have a face value of $1,000 and sell in the market today for $920. There are 10,000 bonds outstanding.
• The risk-free rate is 6 percent.
• The market risk premium is 5 percent.
• The stock’s beta is 1.2.
• The company’s tax rate is 40 percent.
• The company has 50,000 shares of preferred stock with a par value of $100. These shares are currently trading at $105 and pay an annual dividend of $5.40.
• The company also has 1,850,000 common shares trading at $25. These shares last paid an annual dividend of $0.93.
1. What is ABS’c after-tax cost of debt?
2. What is ABC’s cost of preferred equity?
3. What is ABC’s Wd?
