Reference no: EM132046594

Current Project-

Weighted average cost of capital is 13%

The after-tax cost of debt is 7%

Preferred stock is 10.5%

Common equity is 15%

This is a risky project because there is a delay in product sales.

When using the 13% weighted average cost of capital, the project is estimated to return about 10%, which is quite a bit less than the company's weighted average cost of capital.

Suggestion-

Project could be financed from a mix of retained earnings (50%) and bonds (50%).

Retained earnings do not cost the company anything because it is cash you already have and the after-tax cost of debt is only 7%. That would lower your weighted average cost of capital to 3.5% and make your 10% projected return look great.

Is using a mix of 50% retained earnings and 50% bonds a good approach for this expansion.

Please explain why or why not