Barbarita’s Linens want to expand into the store next door to set up a Baby Supply Store. She needs $150,000 for the build out and new inventory of the project.

Barbarita has a $250,000 line of credit from Hialeah National bank that is fully available at an interest rate of 6 percent.   $1,000,000 in equity with a cost of 3 percent. The Barbarita’s Linens just cancelled the $600,000 in preferred stock to Tia Olga, which paid an annual dividend of 10%. The companies’ tax rate is 30%.

a) Calculate the WACC.

b) Please explain this situation in words. How much will the expansion cost in annual interest? Explain your logic.