Calculate the wacc, Accounting Basics

The capital structure of Wild West Inc. is as follows:

-         Debts: $5,000,000 (face value) bonds with coupon rate at 8.00% and current price at par

-         Preferred shares: $2,000,000 (face value) paying 5% dividends which is trading at 95 percent

-         Common shares: Current stock price at $5 per share with 1,000,000 shares issued and outstanding.  The risk-free rate is 5%, the market risk premium is 6%, and the beta of Wild West Inc. is 1.15

-         Marginal tax rate is 40% 

Requirements: Show your calculation

a.       Calculate the WACC for Wild West Inc. 

b.      Should Wild West Inc. accept an IRR of 7% new project which is of similar risk as all the existing projects of the Big Plan?  Why and why not? 

c.       Should Wild West Inc. accept an IRR of 12% new project which is considered 30% higher in risk as compared with all the existing projects of the Big Plan?  Why and why not?

Posted Date: 8/11/2012 1:33:05 AM | Location : United States







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