The director for S Corp. manufacturers of playground equipment, is considering a plan to expand production...

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The director for S Corp. manufacturers of playground equipment,is considering a plan to expand production facilities in order tomeet an increase in demand. He estimates that this expansion willproduce a rate of return of 11%. The firm’s target capitalstructure calls for a debt/equity ratio of .8 . S Corp has a bondissue outstanding for that will mature in 25 years and has a 7%annual coupon rate. The bonds are currently selling for $804. Thefirm has maintained a constant growth rate of 6%. S Corp’s nextexpected dividend is $2(D1) and it current stock price is $40. Itstax rate is 21%. Should it undertake the expansion? Calculate theCost of bonds. Calculate the Cost of equity. Calculate the WACC

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4.0 Ratings (499 Votes)

DA DED DA 08108 04444 Weight of equity 1DA Weight of equity 104444 WE05556 Weight of debt DA Weight of debt See Answer

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The director for S Corp. manufacturers of playground equipment,is considering a plan to expand production facilities in order tomeet an increase in demand. He estimates that this expansion willproduce a rate of return of 11%. The firm’s target capitalstructure calls for a debt/equity ratio of .8 . S Corp has a bondissue outstanding for that will mature in 25 years and has a 7%annual coupon rate. The bonds are currently selling for $804. Thefirm has maintained a constant growth rate of 6%. S Corp’s nextexpected dividend is $2(D1) and it current stock price is $40. Itstax rate is 21%. Should it undertake the expansion? Calculate theCost of bonds. Calculate the Cost of equity. Calculate the WACC