I need help on calculating this question... step-by-step please

Posted on 2013-11-22 11:59:00 in Accounting by KHRISTA CENDANA

Debt:

46,900 7.2 percent coupon bonds outstanding, 18 years to maturity, selling for 93.1 percent of par; the bonds have a $1,000 par value each and make semiannual payments.





Common stock: 769,000 shares outstanding, selling for $95.9 per share; the beta is 1.10.





Preferred stock: 36,900 shares of 6.40 percent preferred stock outstanding, selling for $93.9 per share.





Market: 7.20 percent expected market risk premium; 5.40 percent risk-free rate.



DEI’s tax rate is 40 percent. The project requires $920,000 in initial net working capital investment to get operational.





The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of +3 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI’s project.

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