Reference no: EM132967215

The Ewing Distribution Company is planning a $80 million expansion of its chain of discount service stations to several neighboring states. This expansion will be financed, in part, with debt issued with a coupon interest rate of 14 percent. The bonds have a 15-year maturity and a $1,000 face value, and they will be sold to net Ewing $987 after issue costs. Ewing's marginal tax rate is 40 percent.

• Preferred stock will cost Ewing 14 percent after taxes. Ewing's common stock pays a dividend of $3 per share. The current market price per share is $15, and new shares can be sold to net $14 per share. Ewing's dividends are expected to increase at an annual rate of 3 percent for the foreseeable future. Ewing expects to have $20 million of retained earnings available to finance the expansion.

Ewing's target capital structure is as follows:

Debt 30 %
Preferred stock 20
Common equity 50

Problem 1: Calculate the weighted cost of capital that is appropriate to use in evaluating this expansion program.