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a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock (including flotation costs), and the

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a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock (including flotation costs), and the cost of equity (ignoring flotation costs). Use both the the CAPM method and the dividend growth approach to find the cost of equity.

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INPUTS USED IN THE MODEL $50.00 $3.13 7% 10% 9 Flotation cost for common $32.61 pf $3.30 pf 8% Flotation cost for preferred Bond maturity 20 Payments per year Annual coupon rate 2 12% $1,000.00 $1,171.59 Par Bond price 25% Tax rate Beta 1.2 6.0% Market risk premium, RPM 6.5% Risk free rate, rRF 45% Target capital structure from debt 5% 50% Target capital structure from preferred stock Target capital structure from common stock Cost of debt: 40 N= $60.00 PMT = $1,171.59 $1,000.00 RATE = semiannual yield Annual B-T rd- A-T rd (1-T) 0% Cost of preferred stock (including flotation costs): Net Ppf rpf pf Cost of common equity, dividend growth approach (ignoring flotation costs): D1 I Cost of common equity, CAPM: b x RPM TRF b. Calculate the cost of new stock using the dividend growth approach (include flotation costs) Do x(1g) I Pox(1-F) + c.Assuming that Gao will not issue new equity and will continue to use the same capital structure, what is the company's WACC? 45.0% Wd 5.0% Wpf 50.0% WS 100.0% WACC Ws x A-T rd

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