TRM Consulting Services currently has the following capital structure:

Debt is represented by 15 year original maturity bonds, issued 5 years ago with a coupon rate of 9%, which are currently selling for $945. The bonds pay interest semiannually. The preferred stock pays an $11 dividend annually, and is currently valued at

$125 per share. Flotation costs on debt and preferred equity are negligible and can be ignored, but they will be 8% of the selling price for common stock. The common stock, which can be bought for $41.50, has experienced a 7% annual growth rate in dividends and is expected to pay a $1.25 dividend next year. In addition, the firm expects to have $200,000 of retained earnings.

Assume that TRM's marginal tax rate is 35%.

a. Set up a worksheet with all of the data from the problem in a well-organized input area.

b. Calculate the book-value weights for each source of capital.

c. Calculate the market value weights for each source of capital.

d. Calculate the component costs of capital (i.e., debt, preferred equity, retained earnings, and new common equity).

e. Calculate the weighted average costs of capital using both the market value and book value weights. L01