jgeorgesyouLv1

1 Jun 2024

) Consider a firm that is financed THREE ways: common equity, preferred equity, and long term debt. The firm is considering replacing all of the machinery in its Cleveland plant. They have more than enough cash on hand to pay for the project without raising

external capital. Some relevant information about the firm is given below. Based on all THREE sources of funding, what cost of capital should the firm use to evaluate the project?

 

Stock Price (Common Shares)

$                    15

Number of common shares outstanding

$ 5,000,000

Equity beta (for common stock)

2.5

 

 

Stock Price (Preferred Shares)

$                      8

Number of preferred shares outstanding

$ 10,000,000

Dividends per share on preferred stock

$1.00

 

 

Market value of Total Debt outstanding

$      50,000,000

Yield to maturity on the firm's long term debt

6.5%

Coupon rate on the firms long term debt

2%

 

 

Coupon tax ratae

35%

Risk-free rate

4.5%

Market Risk Premium

5.5%