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Explain Weighted average cost of capital that is appropriate to use in evaluation of expansion program
The Ewing Distribution Co. is planning a $100 million expansion of its chain of discount service stations to several neighboring states. This expansion will be financed, in part, with debt issued with a coupon interest rate of 6.8%. The bonds have a 10 year maturity with a $1,000 face value, and they will be sold to net Ewing $990 per bond. Ewing\'s marginal tax rate is 40%.
Preferred stock will cost Ewing 7.5% after taxes. Ewing\'s common stock pays a dividend of $2 per share. The current market price per share is $35. Ewing\'s dividends are expected to increase at an annual rate of 5% for the foreseeable future. Ewing expects to generate sufficient retained earnings to meet the common equity portion of the funding needed for the expansion.Ewing\'s target capital structure is as follows:
Debt = 20%
Preferred Stock = 5%
Common Equity = 75%
Calculate the weighted cost of capital that is appropriate to use in evaluating this expansion program.
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