. Great Northern Enterprises is looking at a major expansion program that has been proposed by the marketing department. Youve been asked to estimate GNEs cost of capital using the following data.

• The firms tax rate is 35%.
• The current price of GNEs 8% coupon, semiannual payment, noncallable $1,000 bonds with 15 years remaining to maturity is $1,091.96. New bonds would be privately placed with no flotation cost.
• The current price of the firms 6%, $25 par value, quarterly dividend, perpetual preferred stock is $19.74. GNE would incur flotation costs equal to 5% of the proceeds on a new issue.
• GNEs common stock is currently selling at $50 per share. Its last dividend (D₀) was $2.00, and dividends are expected to grow at a constant rate of 5% in the foreseeable future. GNEs beta is 1.2, the yield on government bonds is 4%, and the market risk premium is estimated to be 5%. For the bond-yield-plus-risk-premium approach, the firm uses a 4 percentage point risk premium.
• GNEs target capital structure is 30% long-term debt, 10% preferred stock, and 60% common equity.

1. What is the firms cost of debt(r_d) ?

2. What is the firms cost of preferred stock (r_ps)?

3. Using the CAPM approach, what is firms estimated cost of equity?

4. What is the cost of equity using the discounted cash flow (DCF) approach?

5. What is the cost of equity based on the bond-yield-plus-risk-premium method?

6. What is your final estimate for the cost of equity (r_s) based on the average of the three methods?

7. What is firms weighted average cost of capital (WACC)?

8. GNE estimates that if it issues new common stock, the flotation cost will be 15%. Incorporating the flotation costs into the DCF approach, what would be the estimated cost of newly issued common stock?