Debt: The firm can sell a 14-year, $1,000 par value, 8 percent bond for $960. A flotation cost of

2 percent of the face value would be required.

Preferred Stock: The firm has determined it can issue preferred stock at $85 per share par value. The stock will pay a $12 annual dividend. The cost of issuing and selling the stock is $3 per share.

Common Stock: A firm's common stock is currently selling for $19 per share. The dividend expected to be paid at the end of the coming year is $1.76. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $2 per share in floatation costs. Additionally, the firm's marginal tax rate is 35 percent.

Calculate the weighted average cost of capital up to the point when retained earnings are exhausted- (use the cost of issuing new common stocks).

11.65%

Q1. Sandors Co. optimal capital structure is composed of the following target market value proportions.

Source of Capital

Target Market

Proportions

Long-term debt

Preferred stock

Common stock equity

30%

5%

65%

Debt: The firm can sell a 14-year, $1,000 par value, 8 percent bond for $960. A flotation cost of

2 percent of the face value would be required.

Preferred Stock: The firm has determined it can issue preferred stock at $85 per share par value. The stock will pay a $12 annual dividend. The cost of issuing and selling the stock is $3 per share.

Common Stock: A firm's common stock is currently selling for $19 per share. The dividend expected to be paid at the end of the coming year is $1.76. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $2 per share in floatation costs. Additionally, the firm's marginal tax rate is 35 percent.

Calculate the weighted average cost of capital up to the point when retained earnings are exhausted- (use the cost of issuing new common stocks).