357 CHAPTER9 The Cost of Capita celf-Test Problem Solutions in Appendix) ST9-1 Individual costs and WACC Humble Manufacturing is interest overall cost of capital. The firm is in the 40% tax bracket. Current i gathered the following data: investigation has Debt The firm can raise debt by seling $1,000-par-value 10 made. To sll the Debt The firm can raise debt by selling $1,000-par-value, rate, 10-year bonds on which annual interest payments 10% will be coupon interest To sell the issue, an average discount of $30 per bond must be given. The firm must also given. The made pay flotation costs of $20 per bond. Preferred stock The firm can sell 1 1% (annual dividend) preferred stock at its 5100-per-share par value. The cost of issuing and selling the preferred stock is expected to be $4 per share. Common stock The firm's common stock is currently selling for $80 per share. The firm expects to pay cash dividends of $6 per share next year. The firm's divi- dends have been growing at an annual rate of 6%, and this rate is expected to continue in the future. The stock will have to be underpriced by $4 per share, and flotation costs are expected to amount to $4 per share. Retained earnings The firm expects to have $225,000 of retained earnings avail- able in the coming year. Once these retained carnings are exhausted, the firm will use new common stock as the form of common stock equity financing. a. Calculate the individual cost of each source of financing. (Round to the nearest Calculate the firm's weighted average cost of capital using the weights shown in the following table, which are based on the firm's target capital structure propor- tions. (Round to the nearest 0.1%.) b. Source of capital Long-term debt Preferred stock Common stock equity Weight 40% 15 45 100% Total c. In which, if any, of the investments shown in the following table do you recommend that the firm invest? Explain your answer. How much new financing is required? Investment Expected rate Inicial opportunity of return investment 11.2% S100.000 500,000 150,000 200,000 450,000 600,000 300,000 12.9 16.5 11.8 10.1 10.5