Compute its weighted average cost of capital

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Question - Peace Ray Ltd has $10 million face value of bonds that have 5 years remaining to maturity and 8% coupon rate with semi-annual payments, and are priced to yield 13.65%. If Peace Ray issues up to $2.5 million of new bonds, the bonds will be priced at par and have a yield of 13.65%; if it issues bonds beyond $2.5 million, the expected yield on the entire issuance will be 16%. Peace Ray Ltd currently has 1.2 million ordinary shares outstanding and the share has a beta of 2.2. It has learned that it can issue new ordinary shares at $10 a share. The current risk-free rate is 3% and the expected market return is 10%. The marginal tax rate is 30%. If Peace Ray intends to raise $7.5 million of new capital while maintaining the same debt-to-equity ratio as above, compute its weighted average cost of capital (WACC). Can Peace Ray use the WACC computed for all of its future investment projects? Why?

Reference no: EM133005106

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