Acme Services’ CFO is considering whether to take on a new project that has average risk. She has collected the following information: The company has outstanding bonds that mature in 26 years. The bonds have a face value of $1,000, an annual coupon of 7.5%, and sell in the market today for $920. There are 10,000 bonds outstanding. The risk-free rate is 6%. The market risk premium is 5%. The stock’s beta is 1.2. The company’s tax rate is 40%. The company has 50,000 shares of preferred stock with a par value of $100. These shares are currently trading at $105, and pay an annual dividend of $5.40. The company also has 1,850,000 common shares trading at $25. These shares last paid an annual dividend of $0.93.
What is Acme’s after-tax cost of debt? 4.95% 8.26% 8.87% 9.30% 9.00%
What is Acme’s cost of preferred equity? 4.75% 5.14% 5.74% 9.30% 9.89%