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What is its weighted average cost of capital

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Problem - The financial manager of Alexandria Gazette, Inc., a firm specializing in weekly neighborhood newspapers, is considering expansion of production facilities in order to meet increased demand. It has been estimated that fund spent on the expansion will have an IRR of 10 percent. The firm has been utilizing a debt / total assets ratio of 40 percent as the target capital structure. It currently has a bond issue with 20 years to maturity outstanding that has a coupon rate of 5 percent. However, the bonds are selling in the market for $705; therefore, new debt costs 8 percent. The firm faces a tax rate of 30 percent, and any new debt it issues will have a 20-year maturity. If Alexandria Gazette is expected to have a dividend yield of 6 percent and a growth rate of 4 percent. What is its weighted average cost of capital?

Reference no: EM132927677

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