Reference no: EM132507348
Assume that you have been hired as a consultant by Whole Foods to estimate the firm's weighted average cost of capital. They have provided you the following information:
- Common stock currently sells for $9.00 per share, the company expects to earn $1.80 per share during the current year, its expected payout ratio is 75%, and its expected constant growth rate is 7.00%. The stock has a beta of 1.3. The balance sheet shows that the company has 12 million shares of stock, and the stock has a book value per share of $5.00.
- Balance sheet shows a total of $22 million long-term debt with a coupon rate of 8.40%. Bonds have 14 years to maturity and a quoted price of 106.4. The bonds pay interest semiannually.
- The expected market return is 9% and the risk-free rate is 2%.
- The company recently decided that its target capital structure should have 40% debt, with the balance being common equity. The tax rate is 40%.
a) Calculate the company's WACCs based on book, market, and target capital structures. Which one would you use to evaluate a project?
b) You are evaluating a project that has a risk factor of 3%. What is the minimum expected return you would require from such a project in order to accept it?