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. Verify the WACC for Wild West Inc. (7 marks)
b. Should Wild West Inc. accept an IRR of 7% new project which is of same risk as all the existing projects of the Big Plan? Why and why not? (2 marks)
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