Johnson LLC has an opportunity to expand their mold remediation operation. Their innovative approach is very effective and highly in demand. To expand their operation, they are seeking to build a second facility in southern New England. The cost to build the new facility, fit up and provide for additional start up working capital is $880,000, and carries a 7% opportunity cost to implement. Year 1, business at the new location will produce $350,000 in cashflow, years 2 to 4 will produce $250,000 cashflow each year, and year 5 will produce $200,000 in cashflow.

Using the information above,

Johnson LLC needs to raise additional funds in support of the expansion discussed below. Their corporate bylaws suggest a mix of 45% debt, 5% preferred stock and 50% common stock. The company is in the 35% tax bracket. Please show all work.

a) The company can issue $1,000 bonds at 10%, although the current market is paying 11%. As a result, the company will need to sell the bonds at a discount of $975. (assume the unlikely scenario that the underwriter will provide their services for nothing). What is the firm’s AFTER TAX cost to issue these bonds? (Hint: YTM = going market rate)

b) The company can issue preferred shares of stock at $90 per share and pay an 8% dividend. The stock brokerage firm will charge $5 per share to issue the stock. Please calculate the cost of issuing preferred shares?

c) Finally, the company can issue common stock at $75 per share. The dividend has grown consistently for the past ten years at 7%. Next year they expect to issue a dividend of $7.50. What is the cost of common stock?

d) Calculate the weighted average cost of capital (WACC) for Johnson LLC (using the target capital structure weights aforementioned for debt, preferred stock and common equity.