Problem 1: In computing the cost of capital, do we use the historical costs of existing debt and equity or the current costs as determined in the market? Why?
Problem 2: Why is the cost of debt less than the cost of preferred stock if both securities are priced to yield 10 percent in the market?
Problem 3: Why is the cost of issuing new common stock (Kn) higher than the cost of retained earnings (Ke)?