An investment amount of $8M has to be raised through equity financing and debt financing. The required debt ratio is 35% and the company tax rate is 40%.
a) The current market price of the company’s common stock is $40 and the current dividend is $4 and the dividend is expected to grow at 7% annual rate. The floating cost of issuing a common stock is 10%. Preferred stocks of $100 par value with 12% fixed annual dividend can also be issued at 9% floating cost. If the required proportion of funds from retained earnings to common stocks to preferred stocks are 40%:35%:25% respectively, what is the cost of equity?
b) Bank loans at 12% annual interest. Also, 20-year bonds with a face value $500 per bond paying a fixed dividend of 8% can be issued at $465 per bond and 6% floating cost. If the required ratio of funds raised through these two methods of debt financing is 50%:50%, what is the cost of debt?
c) From (a) and (b), what is the cost of capital?