Because of the increased demand for its product, West, Inc. is in the process of expanding the production capacity. Current plans call for a possible expenditure of $400 thousand on the project. The funds for this project can be obtained by either increasing the borrowing level, issuing new Preferred Stock, or issuing new Common Stock. The current tax rate is 35%. The current capital structure, showing the current yield on the debt and the current market price for the preferred and common stock, is as follows:

Debt: 625,000 @8%

Preferred Stock - $2.20 Dividend - $100,000 amount - $72.00 price

Common Equity - $.75 Yield - $725,000 amount - $45.00 price

The Chief Financial Officer has decided to issue new debt, issue additional Preferred Stock, and sell additional Common Stock shares. The flotation cost for the Preferred Stock will be $4.75 and for Common Stock it will be $3.25. The new capital structure will be as follows should this plan be implemented:

Debt: $775,000 @7.5%

Preferred Stock - $2.20 Dividend - $150,000 amount - $72.00 price

Common Equity - $.75 Yield - $725,000 amount - $45.00 price - $3.25 float cost

Required:

Step 1 - Calculate the cost of capital for debt, preferred stock, common equity in the form of retained earnings, and the weighted average cost of capital, prior to the new plan being implemented. Note that the growth rate for the common stock dividend is 8% and the dividend presented above is the current dividend.

Step 2 - After the issuance of debt, preferred and common stock, calculate the cost of capital for debt, new preferred stock, new common stock, and the weighted average cost of capital, given the execution of the new financing plan to add new capital