What will be the cost of equity and the cost of debt

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Alpha Corporation needs to raise $10 million for plant modernization. Alpha's target capital structure calls for a debt ratio of 0.4, meaning that the project will be financed through $6 million of equity and $4 million of debt. Alpha's beta is known to be 1.8, while the risk-free interest rate is 6 percent. The average market return is 13 percent.

Alpha has decided to finance the remaining $4 million by securing a term loan in the amount of $1.33 million (33.33% of the $4 million) plus $ 2.67 million (66.67 % of the total debt of $4 million) through issuing a 20 year bond carrying an interest rate of 10.74 percent per annum. Alpha's marginal tax rate is 38 percent.

For financing this project, what will be the cost of equity, the cost of debt, and the weighted average cost of capital, WACC?

Reference no: EM13234946

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