wacc

Financing Challenged Inc. is running a capital structure of 15% debt, 15% preferred shares and 70% common shares. The after tax cost of each of these elements is 8%, 10% and 15% respectively. There are some good projects on the horizon but some research has shown that going back to the market to raise new capital will cost 10%, 11% and 18% respectively. The good news is that there is some room at current rates. The bank will extend another $200,000 at the same rate, there are $100,000 in treasury preferred shares and $1,000,000 in preferred common shares.
a. Calculate the current wacc.

b. Find the breakpoints for raising new capital.

c. What are the wacc’s as each of the breakpoints are exceeded.

d. Your first two projects (together) require $1,000,000 in financing. You are wondering if a third (requiring a further $500,000) will be viable. It’s rate of return will be 16%. Do you accept it?