(1) Calculate the cost of debt capital (before and after tax) assuming no floatation

costs.

(2) Calculate the cost of preferred stock assuming no floatation costs.

0 1 2 3 WACC=? H + -100 80 50 30 Tax rate = 40% Capital structure Book value 58% Market value 30% Debt Preferred Stock Common Stock Target structure 60% 8% 32% 2% 40% 10% 60% Debt: Face value at $1,000; 10 years of maturity; 10% semiannual coupons; price $885.30; no addition cost of new debt issuance. Preferred stock: $10 annual dividend per share; price $111.10. Common stock: Price $42; dividend payout (Do) at $4 per share; steady growth of net profits expected at 5% per year Beta at 1.3; risk-free rate (rf) at 8%; market risk premium at 6% For illiquid (infrequently traded) stocks, 3-5% bond-yield risk premium is added to the long-term bond yield