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Question - Mako Inc. (Mako) is a manufacturer of upscale dog beds and is considering expanding its business to include the production of organic pet foods. In order to do this, Mako will require additional financing and requires a calculation of its weighted average cost of capital (WACC).
Currently, Mako has two million common shares outstanding. The common shares have a beta of 1.6, the risk-free rate is 2% and the market price of risk is 5%. The common shares are currently selling for $18 per share. Mako also has 13,000 bonds outstanding with a total face value of $13 million. The bonds will mature in five years and have a coupon rate of 7% paid semi-annually. The current market yield on bonds with similar risk is 8%. Finally, Mako has one million preferred shares outstanding, and they have a current market price of $11 per share. The cost of preferred shares is 7.26%.
Makois subject to tax at a rate of 36%. Flotation costs will be 3% after tax on new debt and common shares, and 4% before tax on new preferred shares.
Assuming that Mako will issue new shares, calculate Mako's WACC?
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