Reference no: EM131089998
On January 1, the total market value of the RXR Company was $100 million. During the year, the firm plans to raise and invest $30 million in a new project. Compared to the risks of the firm's existing assets, the project is about average-risk. The firm's present market value capital structure, shown below, is considered optimal. There is no short-term debt.
Debt: $40,000,000
common equity: $60,000,000
Total capital: $100,000,000
New bonds will have a 8% coupon rate, and they will be sold at par. Common stock is currently selling at $40 a share. The stockholders' required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. The corporate tax rate is 40%.
Assume that the firm intends to finance the new projects in a way that maintains the current capital structure. Further assume that the firm has sufficient cash such that it would not need to issue new common stock to finance the project, what is the WACC for the project?
Select one:
a. 10.56%
b. 11.53%
c. 10.99%
d. 9.19%
e. 9.12%
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