Carling Pharmacy target capital structure is 40% debt and 60% common stock. Information regarding the companys long-term capital can be summarized as follows: Common stock: The companys common stock sells for $5.00 a share and is expected dividend (D1) of $0.30 a share. Dividends are expected to grow at a constant rate of 6% a year. New common stocks issue will attract a flotation cost of $0.50 per share. Bond: Current bond price is $1,010.10 with 10 years to maturity. Coupon rate is 8%, with annual coupon payment. The companys tax rate is 40 percent. a) Calculate the cost of retained earnings (Ks) and cost of new common stock (Ke).

(6 marks)

b) What is the after tax cost of debt?

(2 marks) c) If the firm will be able to use its retained earnings to fund the equity portion of its capital budget, what is the firms WACC?

(7 marks) (Total = 15 Marks)