Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data. The firm is in the 30% tax bracket.
DEBT: The firm can raise debt by selling $1,000 par value, 9% coupon interest rate, 17 year bonds on which annual interest payments will be made. To sell the issue, an average discount of $25 per bond would have to be given. The firm also must pay flotation costs of $15 per bond.
PREFERRED STOCK: The firm can sell 8.5% preferred stok at its $105 per share par value. the cost of issuing and selling the preferred stock is expected to be $7 per share. Preferred stock can be sold under these terms.
COMMON STOCK: The firm's common stock is currently selling for $65 per share. The firm expects to pay cash dividends of $7.5 per share next year. The firm's dividends have been growing at an annual rate of 8% and this growth is expected to continue into the future. The stock must be underpriced by $6 per share, and flotation costs are expected to amount to $6 per share. The firm can sell new common stock under these terms.
RETAINED EARNINGS: When measuring this cost, the firm does not have concern itself with the tax racket or brokerage fees of owners. It expects to have available $100,000 of retained earnings in the coming year'; once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing.
a. Calculate the after-tax cost of debt.
b. Calculate the cost of preferred stock.
c. Calculate the cosst of common stock,.
d Calculate the firm's weighted average cost of capital using he capital structure weights shown in teh following table. (Round answer to the nearest 0.1%)
Source of Capital Weight
Long-Term Debt 35%
Preferred Stock 10
Common Stock Equity 55
Total 100%