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  3. answer both parts 4. blue sky holdings, which h

answer both parts 4. Blue Sky Holdings, which has a beta of...

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Finance

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4. Blue Sky Holdings, which has a beta of 1.6, is in the process of expanding and raising new capital through an initial debt offering. The company has a target capital structure consisting of a debt ratio of 30%. The debt issue has a maturity of 20 years, a face value of $1,000, and will be issued at par with 4% flotation costs. The annual coupon is 8.40% which is paid semi-annually. The company is expected to pay a dividend of $1.30 next year and it should grow at 7% per year indefinitely. Analysts expect the market index to grow at 6.5% per year indefinitely, and the index currently has a dividend yield of 1.80%. The risk free rate is 2% per year. A) (17 points) If the marginal tax rate is 40%, what is the weighted average cost of capital for Blue Sky? B) (3 points) Blue Sky is considering the Islander Project which has an IRR of 11%. Since this project is riskier than their average project, they have decided to bump the hurdle rate (discount rate) by 2%. Should this project be accepted? Why

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