A firm that is in the 35% tax bracket forecasts that it can retain $4 million of new earnings, and plans to raise new capital in the following proportions:

40% from 30-year bonds with a flotation cost of 3% of face value. Their current bonds are selling at a price of 95 (95% of face value), have 3 years remaining, have an annual coupon of 6%, and their investment bank thinks that new bonds will have a 45 basis point (0.45%) higher yield-to-maturity than their current 3-year bonds due to their longer term. Any new bonds will be sold at par.

20% from preferred stock with a flotation cost of 4% of par value. The firm currently has an outstanding issue of $30 face value fixed-rate preferred stock with an annual dividend of $2 per share, and the stock is currently selling at $25 per share. Any newly issued preferred stock will continue with the $30 par-value, and will continue with the $2 dividend.

40% from common equity. Their common dividend payout ratio is 60%, they paid a dividend of $1.61 per share yesterday, the dividend is expected to grow to $4.27 in 20 years, and is expected to continue this growth rate into the foreseeable future. The common stock has a current market price of $18, and their investment banker suggests a flotation cost of 6% of market value on new common equity.

B. Calculate:

1. Preferred stock dividend

2. Stock price (adjusted for flotation costs)

3. Cost of preferred stock

C. Calculate:

1. Dividend at year 1

2. Price of common stock

3. Capital gains yield (growth rate)

4. Cost of retained earnings