Explain what is meant by the 'cost of capital'.

$(2$ marks$)$

Anthony Lid has asked its financial managers to measures the cost of capital. The weighted average cost is o be measured by using the following weights: $40\%$ long$-$term debt, $25\%$ preferred stock and $35\%$ common stock. The firm's tax rate is $25\%.$

Debt

The firm can sell for $$875$ a $10$ year, $$1000$ par value bond paying annual interest at $20\%$ coupon rate. A flotation cost of $6\%$ of the par value is required in addition to the discount of $$125$ per bond.

Preferred Stock

$16\%$ preferred stock having a par value of $$100$ can be sold for $$85\mathrm{.}00.$ An additional fee of $$5\mathrm{.}00$ per share must be paid to the underwriters.

Common Stock

The firm's common stock is currently selling for $$95$ per share. The dividend expected to be paid at the end of the year is $$8\mathrm{.}50.$ Its dividend have grown constantly at $25\%$ for the last few years and is expected that, to sell new common stock must be under$-$priced $$10$ per share and the firm must also pay $$6$ per share in flotation costs.

Calculate:

i$.$ Cost of debt $($after tax$)$

$(8$ marks$)$

ii$.$ Cost of preferred stock

$(4$ marks$)$

iii. Cost of common stock

$(6$ marks$)$

iv$.$ Weighted Average Cost of capital for Robert Lid.

$(5$ marks$)$

$($Total $25$ marks$)$