Financial Management

Tawanda Financial Services Ltd. (TFS) is financed with $2,300,000 in common equity, $1,000,000 in preferred equity and $1,700,000 in debt. TFS is expected to pay a dividend of $2.50 and the dividends are expected to grow at a rate of 4% for the foreseeable future. Their common stock is currently selling for $20 and the applicable tax rate is 30%

New preferred shares can be sold to the public at a price of $85 per share, with a dividend of $7. Flotation costs of $5 per share would be incurred. Debt can be raised at an interest rate of 10% and new common equity will be raised via retained earnings. They plan to maintain the current capital structure after raising additional capital.

i) Calculate the cost of each capital structure component

ii) Determine the weighted average cost of capital (WACC) for TFS.