During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Daviss cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task: (

1) The firms tax rate is 40%.

(2) The current price of Harry Daviss 12% coupon, semiannual payment, non-callable bonds with 15 years remaining to maturity is $1,153.72.

Harry Davis does not use short-term interest-bearing debt on a permanent basis. (3) The current price of the firms 10%, $100 par value, quarterly dividend, perpetual preferred stock is $116.95.

(4) Harry Daviss common stock is currently selling at $50 per share. Its last dividend (D0) was $3.12, and dividends are expected to grow at a constant rate of 5.8% in the foreseeable future. Harry Daviss beta is 1.2, the yield on T-bonds is 5.6%, and the market risk premium is estimated to be 6%.

(5) Harry Daviss target capital structure is 30% long-term debt, 10% preferred stock, and 60% common equity. To help you structure the task, Leigh Jones has asked you to answer the following questions.

a. What sources of capital should be included when you estimate weighted average cost of capital?

b. What is the market interest rate on debt and what is the component cost of this debt for WACC purposes?

c. What is the firms cost of preferred stock?

d. Using the CAPM approach, what is Harry Daviss estimated cost of equity?

e. What is the estimated cost of equity using the discounted cash flow (DCF) approach?

g. What is the weighted average cost of capital (WACC), using DCF approach for cost of equity, rs?