Firm B
Balance sheet (unit: $ millions)
(Asset)		(Liabilities and Equity)
(Current Assets)	$ 130	(Current Liabilities)	$ 50
(Fixed Assets)	$ 330	(Long term debt)	$ 123 ( ? %)
(Total Assets)	$ 460	(Preferred Stock)	$ 41 ( ? %)
		(Common Equity)	$ 246 ( ? %)
		(Total Liabilities & Equity)	$ 460

Firm B can borrow funds from its bank at a pretax cost of 9%. In addition, debt can be raised by selling bonds. The 20-year, $1,000 par value bonds would have a 10.5% coupon rate and semi-annual coupons. The bonds would sell for par value (and assume that there is no floatation cost).

Firm B can sell preferred stock with a 12% dividend rate, and these are trading at par value of $100.

Firm Bs common stock dividend at the end of this year is expected to be $4.80 per share. This $4.80 dividend represents a growth rate of 8 percent over the previous years dividend.

This growth rate is expected to continue. Firm Bs common stock is selling now for $50 per share. For any new issues of stock (both preferred and common), assume that there is no floatation cost. Firm Bs marginal tax rate is 35%.

a) [STEP 1] What is the firms capital structure (%)? ( Do not consider current liabilities)

b) [STEP 2] Calculate the cost of the individual sources of funds

(1) Cost of bank loan debt: Kd = kd(1 - T) = ?%

(2) Cost of bond debt: Kd = kd(1 - T) = ?%

(3) Cost of Preferred equity: Kp = (D / preferred stocks P0) = ?%

(4) Cost of Common equity: Kc = (D1 / common stocks P0) + g = ?%

Again, if flotation cost is non-zero, then cost of common equity (internal) < cost of common equity (external) Anyhow, in this problem, there is no difference between internal and external equity.

c) [STEP 3] Solve for the weighted marginal cost of capital:

(1) Using bank loans, preferred stock and common stock

(2) Using bonds, preferred stock and common stock