Reference no: EM132946139

Question - The E.T Alliance company is negotiating a large-scale project and asks you to estimate its weighted average cost of capital which will serve as its discount rate.

At the beginning of 2017, the financial structure of the company E.T Alliance is optimal and is as follows:

Book value -Long-term debt (obligation) $10,000,000

- Preferred shares (150,000 shares) $5,000,000

- Ordinary shares (6,000,000 shares) $15,000,000

Current long-term debt is made up of 20-year obligations issued exactly 10 years ago (there are still 10 years to go to maturity of outstanding obligations). The coupon rate for outstanding obligations is 12%. New 10-year obligations could be issued at par, with a 9% coupon rate and 5% commission fee (tax deductible).

The annual preferred dividend just paid is $ 4 per share. The preferred stock is currently listed at $ 40. A new issuance of identical preferred shares is planned. It is estimated that this new issue would offer the same rate of return as the existing preferred shares. It would result in commission costs of around 5% tax deductible (5% of the market price).

The annual ordinary dividend just paid is $ 2 per share. The common stock price is currently $ 25 per share. The commission fee for a new issue of common shares will be $ 2 per share and is tax deductible. The infinite dividend growth rate is estimated to be 6.94%. The company E.T Alliance should issue new common shares to finance itself (the retained earnings are insufficient for its self-financing).

If the company is taxed at 40%, determine its weighted average cost of capital.