Problem 2
Lipani Corporation (LC) is considering a project that is vital for the success of the company this coming
year. The project requires $887,000,000 in financing. The company's general manager has asked Dr.
Tiziano Massimiliano to estimate the cost of capital for this project to calculate the project's NPV.
This project is as risky as other projects that the firm is considering now. Dr. Tiziano Massimiliano - with the
consultation of his assistant, Ms. Gianna Berardi, is planning to issue new 20-year bonds at a par value of
$1,000 with a coupon rate of 8%, which can be sold for $1,110 in the bond market. Dr. Tiziano Massimiliano
is also planning to issue new preferred stocks with a $2.50 dividend per share/year and a $1 flotation cost
per share. The preferred stock can be sold at $28 per share. The common stock of LC is currently selling
for $22.00 a share. LC paid a dividend of $1.50 per share last year. Dr. Tiziano Massimiliano and Ms.
Gianna Berardi anticipate that common stock dividends will grow at a constant rate of 6% per year in the
future. LC's Tax Rate is 35%.
Dr. Tiziano Massimiliano suggests the following capital structure:
Common Stock $462,000,000
Debt (bonds) 412,100,000
Preferred Stock 12,900,000
Total $887,000,000
and Ms. Gianna Berardi suggests the following capital structure:
Common Stock $299,000,000
Debt (bonds) 575,100,000
Preferred Stock 12,900,000
Total $887,000,000
a. What is the project's WACC, as suggested by Dr. Tiziano Massimiliano? You need to show your
calculations step by step.
b. What is the project's WACC, as suggested by Ms. Gianna Berardi? You need to show your
calculation step by step.
c. Important: Make a comment on these suggestions. Which one do you prefer and why?
