Please I need help with this question
a) Sandusky Corporation has hired you to investigate the weighted average cost of capital (WACC) that the firm would face at different capital expenditure levels over the coming year. After some investigation, you have gathered the following information:
- Sandusky’s target capital structure is 60 percent equity and 40 percent debt.
- The first $3 million of equity funding can be obtained internally using retained earnings. After that, new common stock will be sold at an estimated price of $50 per share. The firm’s most recent dividend was $2.50 per share and dividends are expected to grow at a rate of 5 percent per year. The firm will incur a flotation cost of $5 per share for any new shares sold.
- Sandusky can issue $3.5 million in new bonds with a before tax cost of 6.5 percent (including flotation costs). Any additional debt would have a before tax cost of 8 percent.
- The firm’s tax rate is 34 percent.
Construct a labeled graph showing the weighted average cost of capital faced by the firm. Be sure to show all intermediate calculations.
b) Assume that the most important capital spending project that Sandusky hasunder consideration is the acquisition of a smaller, rival firm, for a cost of $10 million. The internal rate of return for this project has been estimated as 9 percent. Using the information from the first part of this question, determine whether the proposed acquisition should go forward. Be sure to support your recommendation with an explanation.