Whitney W. Co. plans to raise $2M of new capital for a plant expansion. The capital structure it plans is as follows:
Current Liabilities $100,000 @ 12%
Long-term debt $555,000 @ 9.25%, floatation cost 0.75%
Preferred Stock $350,000, floatation cost 2.5%, sold at $35/share with $1.75 dividend
Common Stock $1M, floatation cost estimated at 10%, dividend $1.25 per share, market price $47, anticipated growth in dividend 8%.
Marginal tax rate is 46% and the average tax rate of its shareholders is 35%.
Determine the cost of each component of the capital and the after-tax marginal cost of capital.