The capital structure of wild west inc is as followsdebts, Ask an Expert

Finance

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%

Show your calculation

a. Calculate the WACC for Wild West Inc.

b. Should Wild West Inc. accept an IRR of 7% new project which is of similar risk as all the existing projects of the Big Plan? Why and why not?

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?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M9522283

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