Equity capital (30 million shares $10 par value)

Preference capital, 15% ( 1 million shares, $100 par)

Retained Earnings at 100 million

Debentures 11% (2.5 million, $100 at par)

Term loans 13% (300 million)

The next expected dividend per shares is $4

The dividend per share is expected to grow at the rate of 15%.

The market price per share is $80.

Preference stock, redeemable after 6 years is currently selling for $110/ share.

Debentures redeemable after 6 years is currently selling for $110/share

Debentures redeemable after 6 years are currently selling for $102/debenture

Tax rate for the company is 35%.

Question

1.Calculate the average cost of capital using book value proportion.

2.a) Market value proportion

b)Define the managerial cost of capital structure for the firm if it raises $450 million next year given the following info:

i)The amount will be raised from equity and term loans in the proportion of 2:1

ii) The firms expects to retain $80 Million earnings next year

iii) The additional issue of equity stock will fetch a net price per share of $75

iv) The debt capital raised by way of term loans will cost 11% for the first $100 Million and 12% for amounts thereafter,