Herberts business has the following capital structure:

Finance Source

% of Capital Structure

Debt (9% coupon, $1,000 par, 12 yr. to maturity)

27%

Preferred ($2 dividend, $25 par)

8%

Common equity

65%

Assume that he wants to raise capital without changing the financing proportions. The market price the current bonds is $1,075, the Preferred stock currently sells for $19 a share, and the market price of Herberts stock is $40, with a current dividend (D₀) of $3.00 and an expected growth rate of 7%. If the current tax rate is 40%, what would be the marginal cost of new capital if it was to come from the sale of new equity, new preferred shares, and new bonds? Assume that there are no issuance costs.

a.

10.51%

b.

11.91%

c.

11.51%

d.

12.52%