The Company X has the following capital structure in market value terms:
Debt $20.000.000
Preferred Stock $8.000.000
Common Stock (120.000 shares) $32.000.000
The company has a marginal tax rate of 20 percent. Company’s debt is currently yielding 20 percent. The firm pays $5 to preferred stock holders and market price of its preferred stock is $25. Expected dividend for the common stock holders is $15, where the current market price of the common stock is $100. The growth rate of dividends (for common stock holders) has been 10 percent and is expected to continue at the same rate.
a) Calculate after-tax cost of debt.
b) Calculate cost of preferred stock.
c) Calculate cost of equity capital.
d) Compute the firm’s; weighted average cost of capital.