Debt: The firm has sold 50, $1,000 par value, 6 percent bond at par. The bonds have a market price today of $990. A flotation cost of $10 per bond would be required on any new bonds issued. This represents a YTM after the floatation costs of to the investors of 6.2%.
Preferred Stock: The firm has issued 1,000 shares of $100 preferred stock at $100 per share par value. The stock will pay a $9.00 annual dividend. The stock has a current price of $98 and the floatation cost of issuing and selling any new share of preferred stock is $3 per share.
Common Stock: The firm has issued 4,000 shares of its common stock at $50 per share. The stock is currently selling for $90 per share. The company just paid a dividend of $4.00 per share and has an expected growth rate of 7 percent. It is expected that to sell, a new common stock issue the firm must pay $2 per share in flotation costs.
Additionally, the firm's marginal tax rate is 30 percent.
Required:
1. Calculate the firm's after tax cost of debt, preferred stock, and common stock for newly issued securities and the cost of its retained earnings.
2. Calculate the appropriate weights for each form of financing based on the current market prices of the securities.
3. Calculate the firm's weighted average cost of capital based on parts 1 and 2 above.