A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.
Target Market
Source of Capital Proportions
Long-term debt 20%
Preferred stock 10%
Common stock equity 70%
Debt: The firm can sell a 12-year, $1,000 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 $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share.
Common Stock: A firm's common stock is currently selling for $18 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 must be underpriced $1 per share in floatation costs. Additionally, the firm's marginal tax rate is 40 percent.
1. The firm's before-tax cost of debt is
2. The firm's after-tax cost of debt is
3. The firm's cost of preferred stock is
4. The firm's cost of a new issue of common stock is
5. The firm's cost of retained earnings is ________.
6. The weighted average cost of capital up to the point when retained earnings are exhausted is