a) The earnings, dividends, and stock price of Finance Inc. are expected to grow at 6% per year in the future. Finance’s common stock sells for $25 per share, its last dividend was $2.50, and the company will pay a dividend of $2.75 at the end of the current year. Using the dividend growth approach, what is the cost of common stock?
b) Finance’s 6% coupon rate, annual payment, $1,000 par value bonds mature in 30 years and sell at a price of $940. The tax rate is 40%, what is the cost of debt (pre and after tax)?
c) Finance Inc. can issue perpetual preferred stock at a price of $75 per share with an annual dividend of $10 per share, what is the cost of preferred stock (ignore floatation costs)?
d) Assuming Finance Inc. has 45% of their capital financed through long-term bonds, 30% in common equity, and the remainder in preferred stock, what is their weighted average cost of capital? (assume they want to maintain these weights).