Organic Produce Corporation has 8 million shares of common stock outstanding, 55

Question

Organic Produce Corporation has 8 million shares of common stock outstanding, 550,000 shares of 7 percent preferred stock outstanding, and 180,000 of 8.2 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $64.50 per share and has a beta of 1.25, the preferred stock currently sells for $107.50 per share, and the bonds have 15 years to maturity and sell for 93.5 percent of par. The market risk premium is 6.8 percent, T-bills are yielding 5.5 percent, and the firm’s tax rate is 34 percent. What is the firms cost of each form of financing? Round answer to two decimals.

Explanation / Answer

Cost of common stock ( CAPM Method) : 5.5 + 1.25 ( 6.8) = 14%

Cost of preferred stock : 7%

Cost of debt : 8.2 ( 1-t) or 8.2 x 0.66 = 5.412 %

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