A firm has determined its optimal capital structure that is composed of the following sources and target market value proportions.
Table 1:
Source of Capital Target Market Portfolio
Long Term Debt 20%
Preferred Stock 10
Common Stock Equity 70
Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of 2 percent of the face value would be required in addition to the discount of $40. The firm's tax rate is 40%.
Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share.
Common Stock: A firm's common stock is currently selling for $18 per share. Floatation costs for a new stock issuance is expected to be $3 per share of stock. The firm anticipates to pay a dividend equal to 6% of the current share price and anticipates that the dividend will continue to grow at a constant rate of 5% per year.
1) What is the firm's cost of a new issue of common stock? (See Table 1)
2) The firm's cost of retained earnings is? (See Table 1)
3) The weighted average cost of capital up to the point when retained earnings are exhausted is? (See Table 1)
4) The weighted average cost of capital after all retained earnings are exhausted is? (See Table 1)