What is the estimated cost of equity

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Reference no: EM131595800

The This Class Is So Fun Company needs to determine the cost of capital rate to be used in the evaluation of new projects. The company has an existing bond issue: $1,000 par value, 5% coupon rate paid annually, 20-year bond, currently sells for $885.30. There is no preferred stock outstanding. The company's common stock currently sells for $32; the next expected dividend is $1.50; and management believes the earnings and dividends will grow at a constant 3.5%/year. The company's tax rate is 40%. Management tries to adhere to a capital structure of 30% debt, 70% equity. SHOW ALL WORK FOR FULL CREDIT. a) What is the after-tax cost of debt? Show the TI BAII Buttons. b) What is the estimated cost of equity? c) What is the weighted average cost of capital? d) Given your answer in part c, if an average risk project (average risk for the company) is estimated to produce a return of 7.5%, should the project be accepted or rejected, and why?

Reference no: EM131595800

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