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Suppose that as a financial manager you have collected the following information on your company. Before-tax cost...

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Finance

Suppose that as a financial manager you have collected thefollowing information on your company.

Before-tax cost of debt6.5%
Tax rate40%
Total long term debt$400,000
Cost of preferred stock7.25%
Total preferred stock$50,000
Cost of common stock11%
Total common stock$500,000
Finance Utilized$850,000

The firm is considering undertaking a project that costs$250,000 with an expected return of 13.5%. Not having enoughexisting capital, how would you recommend going about obtaining theadditional funds? Use the current WACC in your analysis. Discusshow the current WACC will change based on the type of financingchosen.

Answer & Explanation Solved by verified expert
4.3 Ratings (628 Votes)
WACC Cost of Debt Weight of debt1Tax RateCost of preferred stockWeight of Preferred Stock Cost of Common StockWeight of Common Stock Weight of Debt Total debtTotal DebtTotal Preferred StockTotal Common Stock Weight of Preferred Stock Total Preferred StockTotal DebtTotal Preferred StockTotal Common Stock Weight of Common Stock Total Common StockTotal DebtTotal Preferred StockTotal Common Stock Given Cost Value Weight Tax Rate Debt 650 400000 4211 40 Preferred Stock 725 50000 526 Common    See Answer
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