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Assignment help 3405

company’s weighted average cost of capital is 13%

the after-tax cost of debt is 7%

preferred stock is 10.5%, and common equity is 15%.

Using the 13% weighted average cost of capital, the project is estimated to return about 10%, which is quite a bit less than the company’s WACC

Project could be financed from a mix of retained earnings (50%) and bonds (50%). because retained earnings do not cost the company anything because it is cash you already have and the after-tax cost of debt is only 7%. That would lower your WACCto 3.5% and make your 10% projected return look great.

I originally wrote that the 50-50 would be a good idea but my professor said that it isn’t.  Can you explain why? Also can you explain what is meant by the opportunity cost of retained earnings?


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