Discount service stations to several neighboring states

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Reference no: EM131117817

INTERMEDIATE The Ewing Distribution Company is planning a $100 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 15 percent. The bonds have a 10-year maturity and a $1,000 face value, and they will be sold to net Ewing $990 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 $2 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 5 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 20% Preferred stock 5 Common equity 75 Calculate the weighted cost of capital that is appropriate to use in evaluating this expansion program.

Reference no: EM131117817

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