Penn River Ltd. Is considering an investment in a new factory, for which it needs financing.
The firm's balance sheet at the close of 2021 appeared as follows:
Cash
$
1,350,000
Accounts receivable
$
6,360,000
Inventories
$
2,505,000 Long-term debt
$
13,305,000
Net property, plant, and
equipment
$
22,350,000 Common equity
$
19,260,000
Total assets
Total debt and equity
At present, the firm's common stock is selling for a price equal to 2.5 times its book
For the cost of equity and the cost of debt the following information is available:
Common stock: The price of the common stock is $75.00 per share, and dividend per share
was $5.00 last year. The dividend is expected to grow by 3% per year, forever.
Debt: A bond that has $1,000 par value (face value) and a contract or coupon interest rate of 5 percent. A new issue would have a
flotation cost of 3 percent of the $975 market value. The bonds mature in 10 years. The firm's average tax rate is 15 percent,
and its marginal tax rate is 21 percent.
a) Calculate the after-tax cost of debt
b) Calculate the cost of common stock
c) Calculate the weighted average cost of capital (WACC)
