Repo Corp. has hired you to calculate its cost of capital. It has $60 million in debt, $20 million in preferred stock and $120 million in common stock and its tax rate is 40%. Its bonds have semi-annual coupons, an annual coupon rate of 9.79%, a face value of $1,000 and a maturity of 20 years. The current market value of each bond is $1000. The preferred stock has a current market value of $40.00 and a dividend of $4.50 per year. The common stock will pay a dividend of $1.85 in 1 year, has a current price of $26.00 and a growth rate of 6%.
1) What is Repo's annual cost of debt, rd?
2) What is the required return on Repo's preferred stock, rp?
3) What is the required return on Repo's existing common stock, re?