Domelan Van Lines is interested in measuring its cost of capital. They are in a 40% tax bracket and here's their data:
Debt. The firm can raise debt by selling $1,000 par value, 8% coupon interest rate, 20-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $30 per bond would have to be given. The firm also must pay flotation costs of $30 per bond.
Preferred Stock. The firm can sell 8% preferred stock at its $95 per share par value. The cost of issuing and selling the preferred stock is expected to be $5 per share.
Common Stock. The firm's common stock is currently selling for $90 per share. The firm expects to pay cash dividends of $7 per share next year. The firm's dividends have been growing at an annual rate of 6%, and this growth is expected to continue into the future. The stock must be underpriced by $7 per share, and flotation costs are expected to amount to $5 per share. The firm does not expect to utilize retained earnings for new projects.
Calculate the after tax cost of debt.