Calculate cleopatras weighted average cost of capital

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Reference no: EM131513543

Cleopatra's Resorts Incorporated has a current capital structure that is 60 percent equity, 30 percent debt, and 10 percent preferred stock. This is considered optimal. Cleopatra's is considering a $100 million capital budgeting project. During the coming year Cleopatra's expects to have $20 million of retained earnings available to finance this capital budgeting project. The marginal tax rate is 40 percent.

• Cleopatra's can sell $1,000 par value bonds with a 9 percent coupon rate to net $980 after issuance costs. The bonds mature in 15 years, and coupon payments are paid annually.

• Preferred stock can be sold at a $50 price with a $5 annual dividend. Flotation or issuance costs will be $3 per preferred share.

• Common stock can be sold at a $25 price. The common dividend is expected to be $3.00 next year. Dividends have been growing at an annual compound rate of 4 percent annually and are expected to continue growing at that rate into the foreseeable future. Flotation or issuance costs will be $4 per common share.

Calculate Cleopatra's weighted average cost of capital that is appropriate to use in evaluating this capital budgeting project. What is the weighted average cost of capital?

Reference no: EM131513543

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