Initial investment-target capital structure-preferred stock

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Reference no: EM13919697

Kuhn Co. is considering a new project that will require an initial investment of 20 million. It has a target capital structure of 35% debt, 2% preferred stock, and 63% common equity. Kuhn has non callable bonds outstanding that mature in 15 years with a face value of $1000, an annual coupon rate of 11%, and a market price of $1,555.38. The yeild on the company's current bonds is a good approximation of the yeild on any new bonds that it issues. The company can sell shares of preferred stock that pay an annual dividend of $8 at a price of $95.70 per share.

Kuhn does not have any retained earnings available to finance this project, so the firm will have to issue new common stock to help fund it. Its common stock is currently selling for $33.35 per share, and it is expected to pay a dividend of $1.36 at the end of next year. Flotation costs will represent 3% of the funds raised by issuing new common stock. The company is projected to grow at a constant rate of 8.7%, and they face a tax rate of 40%. Determine what Kuhn Company's WACC will be for this project.

a. 9.92%

b. 10.40%

c. 7.56%

d. 9.45

Reference no: EM13919697

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