Question
Abc Inc. has decided that the capital it is raising will consist of 10% preferred stock, 20% common stock, 30% retained earnings, and 40% debt.
Abc Inc. has decided that the capital it is raising will consist of 10% preferred stock, 20% common stock, 30% retained earnings, and 40% debt. Abc has outstanding 20 year semi-annual, 6% coupon bonds selling for $1,050. The par value of the bonds is $1,000. Abcs common stock sells for $50 per share. Abc expects that it will pay a $3 dividend next year and that its dividend will grow at 6% a year. If Abc sells new common it must pay a $5 per share flotation fee. Abcs preferred stock currently sells for $54, and its annual dividend is $4 per share. If Abc were to sell new preferred stock, it would pay $4 per share as flotation cost. Abcs tax rate is 40%. a. What is Abcs after tax cost of debt capital? b. What is Abcs cost of preferred stock capital? c. What is Abcs cost of common stock? d. What is Abcs cost of retained earnings? e. What is Abcs cost of capital?
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