Case Ouestions (show all of your work) 1. 2. 3. 4. 5. 6. Determine the weights of each component in the capital structure: Usethe amount of retained earnings provided. The percentage composition (weights)in the capital structure for bonds, preferred stock, and common equity should be based on the current capital structure long-term financing section as shown in Figure 1 (indicated as $18.75 million). Common equity will remain at the current weight throughout the case, and the combined tax rate is 35%. Determine the cost for each component in the capital structure (after-tax cost of debt, cost of preferred stock, cost of equity). Use your calculator to solve for the interest rate (l). Given your results from questions 1 and 2 above, calculate the weighted average cost of capital (WACC). Now assume that new common stock will be used in the capital structure (you will obtain new common stock with flotation costs). Also assume all the weights remain the same; common equity is now supplied by new common stock, rather than by retained earnings (debt and preferred stock costs remain the same). Recalculate the weighted average cost using new common stock in the capital structure. Remember to consider flotation costs. The increase in the cost of capital will take place at a certain level of financing, where the cost of financing increases (known as the marginal cost of capital): What is this level of financing (dollar amount)? Determine this by dividing retained earnings by the percent of common equity in the capital structure (as noted in Question 1). You have been told that the investment banker wishes to use the capital asset pricing model (CAPM, as shown on p. 388 in the 15th edition of the text), to compute the cost (required return) on commonstock. Assurne the risk free rate (rRF) is 4.9%, beta for the firm is 1.30, and the market risk premium (RPM) is 6.8% a. What is required rate of return for common equity using this method? b. Secondly, how does it compare to the required rate of return computed in Question labove?