Empire Today Inc. has 10 million shares of common stockoutstanding, 300,000 shares of 5% preferred stock outstanding, and7 million of 6.7 percent semiannual bonds outstanding, par value$1,000 each. The common stock currently sells for $85 per share andhas a beta of 1.15, the preferred stock currently sells for $103per share, and the bonds have 20 years to maturity and sell for 93%of par. The market risk premium is 11 percent, T-bills are yielding2.14 %, and the firm's tax rate is 25.7%.
1) Calculate the firm’s Weighted Average Cost of Capital andexplain the meaning of WACC using your calculated solution.
2) The CFO is assessing a potential project which will yield anIRR of 9.3%. The project has the firm level risk. Should the CFOaccept the project? Provide your explanations.
