Rowing Boats Inc. has asked a group of financial consultants to help them determine their component and average costs of capital. The consultants have been able to gather the following information: The current price of the firm’s 10-year, $7000 par value, zero-coupon bonds is $3,134. The price of the firm’s preferred stock, par value of $100, is $139 and pays dividends of 9% per year (note: dividends are calculated based on par value). The common stock has a current price of $27 per share, expects to pay $2 per share in annual dividends next year, and has an expected annual growth rate in dividends of 6%. The market value of the sources of financing is debt at $2,000,000, common stock at $5,500,000, and preferred stock at $500,000. The firm is in a 40% tax bracket.
a. What is the after tax cost of debt the firm’s debt?
b. What is the firm’s cost of preferred stock?
c. What is the firm’s cost of equity?
d. What is the firm’s weighted average cost of capital adjusted for taxes?