Question
calculation of individual costs and WACCLang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data. The firm
calculation of individual costs and WACCLang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data. The firm is in the 21% tax bracket.DebtThe firm can raise debt by selling $1,000-par-value, 8% coupon interestrate, 20-year bonds on which annual interest payments will be made. To sell theissue, an average discount of $30 per bond would have to be given. The firm also must pay flotation costs of $30 per bond.Preferred stockThe firm can sell 8% preferred stock at its $95-per-share par value. The cost of issuingand selling the preferred stock is expected to be $5 per share. Preferred stock can be sold under these terms. Common stockThefirm's common stock is currently selling for $90 per share. The firm expects to pay cash dividends of $7 per share next year. Thefirm's dividends have been growing at an annual rate of 6%, and this growth is expected to continue into the future. The stock must be underpriced by $7pershare, and flotation costs are expected to amount to $5 per share. The firm can sell new common stock under these terms. Retained earnings When measuring thiscost, the firm does not concern itself with the tax bracket or brokerage fees of owners. It expects to have available $100,000 of retained earnings in the comingyear; once these retained earnings areexhausted, the firm will use new common stock as the form of common stock equity financing.
a.Calculate theafter-tax cost of debt.
b.Calculate the cost of preferred stock.
c.Calculate the cost of common stock.
d.Calculate thefirm's weighted average cost of capital using the capital structure weights shown in the followingtable,
Source of capitalWeight
Long-term debt30%
Preferred stock20
Common stock equity. 50
Total100
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