Reference no: EM133114447
An analyst has collected the following information regarding Davidson Corporation:
Long Term Bonds $400,000,000
Preferred Stock $100,000,000 (400,000 shares outstanding)
Total Common Equity $300,000,000
Common Stock $285,000,000 (20,000,000 shares outstanding)
Retained Earnings $ 15,000,000
Expected per share dividend, Common $1.89
Expected per share dividend, Preferred $20.00
Marginal Tax Rate 35%
Interest Expense (previous year) $33,360,000
Expected Growth Rate 8%
Flotation cost for new Common Stock $.75 per share
Present Bond Yield (Y-T-M) 8.34%
Retained Earnings available $15,000,000
Risk Free Rate 4.0%
Expected Return of the Market 15.0%
Davidson's beta 1.25
Common and Preferred Stock both selling at Book Value
(1) Calculate the Davidson's WACC using Retained Earnings as the equity component cost.
(2) What is the largest project Davidson Corporation can undertake before it must raise new equity?
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