# wacc

A firm is considering a new project which would be similar in terms of risk to its existing projects. The firm needs a discount rate for evaluation purposes. The firm has enough cash on hand to provide the necessary equity financing for the project. Also, the firm:

has 1,000,000 common shares outstanding

current price \$11.25 per share

next year’s dividend expected to be \$1 per share

firm estimates dividends will grow at 5% per year after that

flotation costs for new shares would be \$0.10 per share

has 150,000 preferred shares outstanding

current price is \$9.50 per share

dividend is \$0.95 per share

if new preferred are issued, they must be sold at 5% less than the current market price (to ensure they sell) and involve direct flotation costs of \$0.25 per share

has a total of \$10,000,000 (par value) in debt outstanding. The debt is in the form of bonds with 10 years left to maturity. They pay annual coupons at a coupon rate of 11.3%. Currently, the bonds sell at 106% of par value. Flotation costs for new bonds would equal 6% of par value.

The firm’s tax rate is 40%. What is the appropriate discount rate for the new project?