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23) Weighted average cost of capital (15 points) A firm's CEO has set the company's target capital structure as 40% long-term debt, 10% preferred stock,
23) Weighted average cost of capital (15 points) A firm's CEO has set the company's target capital structure as 40% long-term debt, 10% preferred stock, and 50% common stock equity. The firm's corporate tax rate is 25 percent. To finance its planned capital expenditures, the firm is looking at the following sources of capital: Debt: The firm can sell 30-year, $1,000 par value bonds that pay a 6% coupon, with interest paid semi-annually, for $970. To issue the bond, the firm will have to pay $20 in flotation costs per bond. Preferred Stock: The firm can sell a 5% preferred stock at a par value of $100 per share. The cost of issuing and selling the preferred stock is $10 per share. Common Stock: The firm's common stock is currently selling for $50 per share. This year, the firm paid $3 in dividends per share. The firm's dividends have been growing at a constant rate of 1.5% per year for the last ten years and are expected to sustain this growth rate thereafter. New common stock issue: If the firm decides to issue new common stock, its underwriter indicated that the new stocks would sell for $42 per share. Further, the firm will have to pay $2 per share in flotation costs. Dividend and dividend growth rate are expected to remain the same. a) Find the firm's after-tax cost of debt financing (2 points)
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