MGFD70H3 Study Guide - Final Guide: Risk-Free Interest Rate, Westjet, Preferred Stock
Document Summary
Review problems on cost of capital and capital structure policy. Westjet limited is considering building a new manufacturing plant to produce wjets on the land it bought 10 years ago for ,000,000. The construction cost of the plant will be ,000,000. The following market data on the westjet limited is current: 2,000,000 shares, selling for each; the beta is 1. 100,000 7% annual coupon bonds, 20 years to maturity, selling for. 1,000,000 shares of 3. 5% preferred stock outstanding, selling for. Expected return on the market 8%, the risk free rate of return is 3%, and the corporate tax rate is 40%. An initial investment of ,000,000 in net working capital is required. The plant will have 25 years life, will be depreciated straight line, and will have zero salvage value after 25 year. Westjet limited will make 300,000 wjets per year, and sell them at an average price of each.
