Century Distribution Company is planning a $100 million expansion of its chain of discount service stations to several neighboring parishes. This expansion will be financed as follows:

Debt issued with a coupon interest rate of 15 percent. The bonds have a 10-year maturity and a $1,000 face value, and they will be sold to net Century $990 after issue costs. Centurys marginal tax rate is 25 percent.

15% preferred stock having a par value of $100 can be sold for $95.00. An additional fee of $7.00 per share must be paid to the underwriters.

Centurys common stock pays a dividend of $2 per share. New shares can be sold to net $14 per share. Centurys dividends are expected to increase at an annual rate of 5 percent for the foreseeable future.

Centurys capital structure is made up as follows:

Debt $20 000,000

Preferred stock 5 000,000

Common equity 75 000,000

(a) (i) Explain what is meant by the term cost of capital. (2 marks)

(ii) Explain TWO reasons why the WACC is important to a company (6 marks)

(b) Calculate:

i. Cost of debt (after tax) (6 marks)

ii. Cost of preferred stock (4 marks)

iii. Cost of common stock (4 marks)

iv. Weighted Average Cost of capital for Century Ltd. (6 marks)

(c) Many factors affect a firms cost of capital. Discuss TWO factors that lie within the control of the firm and ONE factor that is outside of the firms control. (9 marks)