Use in evaluating this capital budgeting project

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Reference no: EM131512274

Poon Noodle House's current capital structure is 70 percent equity, 25 percent debt, and 5 percent preferred stock. This is considered optimal. Poon is considering a $50 million capital budgeting project. During the coming year Poon expects to have $15 million of retained earnings available to finance this capital budgeting project. The marginal tax rate is 40 percent.

• Poon can raise long-term debt at a pretax interest rate of 7 percent.

• Preferred stock can be sold at a $25 price with a $2 annual dividend. Flotation or issuance costs will be $3 per preferred share.

• Common stock can be sold at a $20 price. The common dividend is expected to be $3.00 next year. Dividends have been growing at an annual compound rate of 4 percent annually and are expected to continue growing at that rate into the foreseeable future. Flotation or issuance costs will be $4 per common share.

Calculate Poon's weighted average cost of capital that is appropriate to use in evaluating this capital budgeting project.

Reference no: EM131512274

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