A firms target capital structure is 35% debt and 65% equity (10% preferred stock and 55% common stock). The firms tax rate for ordinary income and capital gains is 40%.

Given:

No floatation costs

Annual bond interest rate = 10%

Bond face value = $1,000

Bond discount cost = $20

Bond term = 10 years

The annual dividend of the preferred stock is $6.00 per share.

The current market price of preferred stock is $90.00.

The market price of common stock is $100.

Historic common stock dividends per share are:

Year Dividends

20X1 $2.72

20X2 $2.80

20X3 $2.97

20X4 $3.41

20X5 $3.70

20X6 $4.00 (expected next year dividend)

a.Debt: Calculate the cost of debt using the approximation method. ___________

b.Preferred Stock: Calculate the cost of preferred stock. _______________

c. Common Stock and RE: Use the constant growth model (Gordon) to calculate the

cost of common stock. __________________

. Calculate the weighted average cost of capital (WACC) given the percentage of funds

with cost are held in the proportion of the target capital structure.

Funds with cost: Opt Cap Str Cost Extended

Debt

P/S

C/S

WACC