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What is the cost of equity of the company

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Question - X company clinches a contract to supply cleaning services to a nursing home for the next 5 years. Under the contracts, the company will be paid 1 million a year. To take the contract it would have to invest in new cleaning equipment with a cost of 600,000 which will be depreciated straight line to zero over 5 years. There is no salvage value at the end of 5 years. Labour cost will be 300,000 per year and overheads 250,000 per year. The company will need to invest in net working capital of 350,000. It plans to issue 1 million worth of bonds for 5 years at a coupon rate of 6% and will price the bonds at par. The company has an existing bank loan of 9 million. The cost of debt from the bank loan is the same as the bonds. The common stock of the company is selling for $10 per share and it has 2 million shares outstanding. Expected dividend next year is $1 per share and dividends are expected to grow at 2% per annum into the foresseable future.

(A) What is the cost of equity of the company?

(B) What is the cost of debt of the company?

(C) Calculate the WACC of the company.

Reference no: EM133185140

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