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%.

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

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