Answer:
a) total debt = $38 million
after tax cost of debt = 8% x (1 - 35%) = 5.2%
total preferred stocks = $15 million
cost of preferred stock = 10%
total common stocks = 4,125,000 x 20% = $82,500,000
Re = 5% + (1.25 x 8%) = 15%
weight of debt = 38 / 135.5 = 28.04%
weight of preferred stocks = 15 / 135.5 = 11.07%
weight of common stocks = 60.89%
WACC = (60.89% x 15%) + (11.07% x 10%) + (28.04% x 5.2%) = 11.7%
b) The project should be rejected because 11% is lower than the company's WACC (11.7%)
