Calculate weighted average cost of capital-expansion program

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Reference no: EM13826228

Wilson Electric is planning a $100 million expansion. This expansion will be financed, in part with debt issued with a coupon interest rate of 8.27%. The bonds have a 20-year maturity and a $1000 face value, and they will be sold to net Wilson Electric $996 after issue costs. Wilson Electric’s marginal tax rate is 40%.

Preferred stock will cost Wilson Electric 12% after tax. Wilson Electric’s common stock pays a dividend of $2 per share. The current market price per share is $25, and new share can be sold to net $24 per share. Wilson Electric’s dividends are expected to increase at an annual rate of 5% for the foreseeable future. Wilson Electric expects to have $20 million of retained earnings available to finance the expansion.

Wilson Electric’s target capital structure is as follows:

Debt 25%

Preferred Stock 10%

Common Equity 65%

Calculate the weighted average cost of capital that is appropriate to use in evaluating this expansion program.

A. 10.25%

B. 11.31%

C. 12.08%

D. 13.17%

Reference no: EM13826228

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