Reference no: EM131063491
LilyMac Studios, a national chain of photography studios, is considering opening up a chain of coffee shop/art galleries. While the existing operations of the firm have a beta of 1.17, the new chain is expected to have a beta of 0.8.
LilyMac currently has 500,000 shares of common stock outstanding, which are selling for $63.72 per share, and a $10 million bond issue, selling at 104 percent of par. The expected market risk premium is 6 percent, and the current risk-free rate is 5.5 percent. The bonds pay an 8 percent semiannual coupon and mature in 20 years.
The current operations of the firm produce EBIT of $18 million per year, and the chain’s operations are expected to add $25 million per year to that. The new chain will be funded with 65 percent equity and 35 percent debt, and estimated flotation costs are expected to be 12 percent and 5 percent, respectively.
What should be the WACC for the new chain of coffee shops?
Please show all work beacause I'm very confused
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