Raising new capital through an initial debt offering

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Alvarez River Holdings, which has a beta of 1.5, is in the process of expanding and raising new capital through an initial debt offering. The company has a target capital structure consisting of a debt to value ratio of 35%. The debt issue has a maturity of 25 years, a face value of $1,000, and will be issued at par with 4% flotation costs. The annual coupon is 7.60% which is paid semi-annually. The company is expected to pay a dividend of $1.20 next year and it should grow at 7% per year indefinitely. Analysts expect the market index to grow at 6% per year indefinitely, and the index currently has a dividend yield of2.0%. The risk free rate is 3% per year. If the marginal tax rate is 40%, what is the weighted average cost of capital for Alvarez? (Please show work)

Reference no: EM131875843

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