3. Widner Industries is evaluating its cost of capital for a capital budgeting project thats expected to last 5 years. Its current capital structure at book value is:

Bonds - ($1,000 par value, 5 years to maturity, $250,000,000

7.5% coupon rate)

Preferred Stock - ($100 par value, 8% dividend) $50,000,000

Common Stock - ($1 par value) $50,000,000

Retained Earnings $400,000,000

The current price of a bond is $960.84. The flotation costs for issuing new bonds are 2% of the current price.

The current price of a share of preferred stock is $92. The flotation costs for new preferred stock are 6% of the market price.

The current price of a share of common stock is $15. Flotation costs are 8% of the market price. The firm just paid a $1.00 dividend this year and investors expect dividends to grow at an annual rate of 5%. The corporation's marginal tax rate is 25%.

1. If the firm generates $100,000,000 in retained earnings, calculate the break point in the cost of capital schedule.

2. Using market value weights, calculate the firm's cost of capital assuming the firm's capital budget is expected to be $150,000,000.