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Question - Cans-R-Us (CRU) is a recycling company located in the suburbs of Maroochy. CRU is currently evaluating a potential new investment which will require approximately $200 million in new financing. You have been asked to help in the decision by determining CRU's weighted average cost of capital.
There are 15 million CRU common stock outstanding and their current market value is $21.50 per share. CRU's most recent earnings were $3.10 per share and last year's dividend was $1.24 per share. CRU has maintained constant dividend payout ratio over its history and earnings are expected to grow at an average rate of 2% per year for the foreseeable future.
CRU also has 8 million preferred shares outstanding which are currently trading at $40. The preferred shares have a stated par value of $35 and a stated dividend rate of $4 per share.
Finally, CRU has a $300 million face value long-term debt issue outstanding which has eight years left to maturity, carries a 10% coupon with interest paid semi-annually, and is currently priced at $1,116.52 to provide for a yield of 8%.
Flotation costs are expected to be 2% after-tax on both common and preferred shares and 4% before-tax on debt. CRU's tax rate is 51%.
Required - What is the weighted average cost of capital assuming new common equity is issued?
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