A firm has determined its optimal capital structure which is composed of the fol

Question

A firm has determined its optimal capital structure which is composed of the following sources and target market calve proportions. Debt: The firm can sell a 12-year, 31,000 par value, 7 percent bond for $960. A flotation cost of 2 percent of the face value would be required in addition to the discount of $40. Preferred Stock: The firm has determined it can issue preferred stock at S75 per share par value. The stock will pay a SI 0 annual dividend. The cost of issuing and selling the stock is S3 per share. Common Stock: A firm's common stock is currently selling for SIX per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue most be underpriced SI per share in floatation costs. Additionally, the firm's marginal tax rate. is 40 percent. Calculate the following: The firm's before-tax cost of debt The firm's after-tax cost of debt The firm's cost of preferred stock The firm's cost of a new issue of common stock The firm's cost of retained earnings The weighted average cost of capital

Explanation / Answer

1.70/ 1000-20-40 =70/940*100=7.4468%

2.7.4468*60%=4.4680%

3.10/72=13.88%

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