Parry Instruments has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital (WACC). The WACC is to be measured by using the following weights: 30% long-term debt, 40% preferred stock, and 30% common stock equity (retained earnings, new common stock, or both). The firm’s tax rate is 25%.

Long-term debt The firm can sell for £103 a ten-year, £100-par-value bond paying annual interest at a 4% coupon rate. A flotation cost of £2 per bond is required.

Common stock The firm’s common stock is currently selling for £30 per share. The stock has paid a dividend that has gradually increased for many years, rising from £1.35 ten years ago to the £2 dividend that the company just recently paid. If the company wants to issue new common shares, it will sell them for £29.25 per share to attract investors, and the company will pay £1 per share in flotation costs.
Preferred Stock A 10% (annual dividend) preferred stock having a par value of £100 can be sold for £97. An additional fee of £1 per share must be paid to the underwriters.

a. Calculate the after-tax cost of debt.

b. Calculate the cost of preferred stock.

c. Calculate the cost of common stock (both retained earnings and new common stock).

d. Using the values calculated in parts a, b, and c, calculate the WACC for Parry Instruments.