Davola Inc. has the following financial information: Debt: The firm issued 1,000, 20 year bonds five years ago which were sold at a par value of $1,000. The bonds carry a coupon rate of 8.4%. Preferred Stock: Pays a 9.75% preferred dividend with a par of $100 and is currently selling for $86. Equity: Davolas common stock currently sells for $72 and grows at a constant rate of 6%. Davola just paid a $4.65 dividend to their shareholders. Davolas business plan for next year projects net income of $360,000, half of which will be retained. The company applies an average tax rate of 35% for cost of capital decision-making purposes. Dovola Inc. pays flotation costs of 10% on all new stock issues. Dovolas capital structure is 40% debt, 15% preferred stock and 45% common equity.

a. Compute the capital component costs for each of the capital components. Ignore flotation costs for debt and preferred stock.

b. Calculate the WACC before the break in retained earnings.

c. Calculate Davolas break point in retained earnings.

d. Calculate the WACC after the break in retained earnings. In other words, calculate the WACC given the point that the firm will have to issue new stock to fund the equity portion of its capital budget.