Hightop’s CFO is considering whether to take on the new project which has average risk. He gathered the information given below:
i) The company has bonds outstanding that mature in 26 years with the annual coupon of 7.5 percent. The bonds contain the face value of $1,000 and sell in market today for $920. There are 10,000 bonds outstanding.
ii) The risk-free rate is 6%.
iii) The market risk premium is 5%.
iv) The stock’s beta is 1.2.
v) The company’s tax rate is 40%.
vi) The company has 50,000 shares of preferred stock with the par value of $100. These shares are presently trading at $105 and pay the annual dividend of $5.40.
vii) The company also has 1,850,000 common shares trading at $25. These shares last paid the annual dividend of $0.93.
1) What is Hightop’s after-tax cost of debt?
2) What is Hightop’s cost of preferred equity?
3) What is Hightop’s Wd?
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