Larry requires $15 million to fund its current year’s capital projects. Larry will finance part of its need with $9 million in internally generated funds. The firm’s common stock market price is $120 per share. Dividends of $5 per share at t = 0 are expected to grow at a rate of 11% per year for the foreseeable future. Another part will be funded with the proceeds (at $96 per share) from an issue of 9,375 shares of 12% $100 par preferred stock that will be privately placed. The remainder will be financed with debt. Five thousand 10-year $1000 par bonds with a coupon rate of 15% will be issued to net the firm $1020 each. Interest is paid annually on the bonds. The firm’s tax rate is 30%.
What is Larry's cost of capital?
Larry has now decided to double its financing requirements. The financing proportions will remain as in (a). No additional internally generated funds are available. New common stock can be sold at $100 per share. Additional preferred stock and debt can be sold with all of the same conditions as in (a) except the dividend rate on preferred stock is 13.5%. What is Larry cost of capital for this second increment of financing?