COST OF CAPITAL PRACTICE

JTA Supermarket has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 50% long-term debt, 10% preferred stock, and 40% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 30%.

Debt: The firm can sell for $1010 a 5-year, $1,000-par-value bond paying annual interest at a 10% coupon rate. A flotation cost of $30 is required.

Preferred stock: 6 percent (annual dividend) preferred stock having a par value of $100 can be sold for $100. An additional fee of $5 per share must be paid to the underwriters.

Common stock: The firm's common stock is currently selling for $45 per share. The dividend expected to be paid at the end of the coming year is $2.50. Its dividend payments has been growing at a rate of 5%.It is expected that to attract buyers, new common stock must be under-priced $5 per share, and the firm must also pay $5 per share in flotation costs. Assume JTA Supermarket doesn't have enough Retained Earnings to cover the requirement by the common stock.

Requirements:

a. Calculate the after-tax cost of debt.

b. Calculate the cost of preferred stock.

c. Calculate the cost of common stock.

d. Calculate the WACC for JTA Supermarket.