Reference no: EM131509173

Fogelman Company currently has 1.2 million common shares of stock outstanding and the stock has a beta of 1.5. It also has $10 million face value of bonds that have five years remaining to maturity and 8 percent coupon with semi-annual payments, and are priced to yield 12 percent. If Fogelman issues up to $2.5 million of new bonds, the bonds will be priced at par and have a yield of 12 percent; if it issues bonds beyond $2.5 million, the expected yield on the entire issuance will be 14 percent. Fogelman has learned that it can issue new common stock at $10 a share. The current risk-free rate of interest is 2 percent and the expected market return is 6 percent. Fogelman’s marginal tax rate is 30 percent. If Fogelman raises $7.5 million of new capital while maintaining the same debt-to-equity ratio, what is its weighted average cost of capital? Please show all work.