1: Arabica Inc. has a tax rate of 40%. The following information is given:

Debt: Arabica can raise debt by selling $1,000-par-value, 8% coupon interest rate, 5-year bonds with

annual compounding. Since the market interest is higher than the coupon rate, the bond is sold at a

discount of $15. There is an associated flotation cost of 4% of par value.

Preferred stock: The security has a par value of $100 per share, the annual dividend rate is 8% of the par

value, and the flotation cost is expected to be $3 per share. The preferred stock is expected to sell for $106

before cost considerations.

Common stock: Common stock is $20 per share currently. The cash dividend is expected to be $1.5 per

share next year. The firm's dividends have grown at an annual rate of 3%, till infinity. The flotation costs

are expected to be approximately $1 per share.

The market value of the long-term debt is $1,825,500, preferred stock is $2,425,000 and common stock

equity valued to $1,595,000.

Required:

a. Calculate the after-tax cost of debt.

b. Calculate the cost of preferred stock.

c. Calculate the cost of new common stock.

d. Calculate the firm's weighted average cost of capital using retained earnings.

e. Calculate the firm's weighted average cost of capital using new common stock.

Question no 3