Calculate the after tax weighted average cost of capital

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Reference no: EM133331712

Assignment:

A company wants to raise $6.2 million for investing in a new outlet, which will give a 15% return on its investment. The financing will be obtained from the following sources: Bonds $1,000,000 Mortgage $300,000 Common shares $3,000,000 Preferred shares $700,000 Retained earnings $1,200,000 Total $ 6,200,000 The before tax cost of capital for each source of financing is: Bonds 8.0% Mortgage 10.5% Common shares 16.0% Preferred shares 12.0% Retained earnings 14.0% The company's corporate income tax rate is 40% Required:

a) Calculate the after tax weighted average cost of capital (WACC). Round the weights and weighted cost calculations three decimal places.

b) Should the business invest in the new outlet? Explain why or why not. Note: You must provide all of your answers on the worksheet provided.

Reference no: EM133331712

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