The capital structure for the Pit Bull Corporation is provided below. The company plans to maintain its debt structure in the future. The firm has bonds that pay a 7% coupon rate (assume semiannual payments), mature in 10 years and sell for $1070. The preferred stock is selling for $31 and pays a $2.75 dividend. The common stock is selling for $40, just paid a $1.70 dividend and is expected to grow by 6% for the indefinite future. The firm’s marginal tax bracket is 34%.
What is the after-tax cost of preferred and common capital respectively?
CAPITAL STRUCTURE ($000)
Bonds $ 75,000
Preferred Stock $ 25,000
Common Stock $ 180,000