Your plans to invest $200 million in two (2) projects. The first project you are contemplating is to a restaurant and sports bar and the second is to invest in a hardware store. The problem is that you have never been one to stay with and project for too long, so you figure that your time frame is five years. Your target capital structure is 40% debt, 10% preferred stock and 5-% common stock. The interest rate on new debt securities is 8, the yield on preferred stock is 10%, the cost of retained earnings is 15% and the tax rate is 30%. i) Compute the project’s cost of capital. NB. Do not use excel to show answers, show all working to show how we arrive at the answer.

Your plans to invest $200 million in two (2) projects. The first project you are contemplating is to a restaurant and sports bar and the second is to invest in a hardware store. The problem is that you have never been one to stay with and project for too long, so you figure that your time frame is five years. Your target capital structure is 40% debt, 10% preferred stock and 5-% common stock. The interest rate on new debt securities is 8, the yield on preferred stock is 10%, the cost of retained earnings is 15% and the tax rate is 30%. i) Compute the project’s cost of capital. NB. Do not use excel to show answers, show all working to show how we arrive at the answer.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 8P

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