Intro Honda is considering increasing production after unexpected strong demand for its new motorbike. To evaluate the proposal, the company needs to calculate its cost of capital. You've collected the following information: - The company wants to maintain is current capital structure, Which is 40% equity, 20% preferred stock and 40% debt. - The firm has marginal tax rate of 34%. - The firm's preferred stock pays an annual dividend of $5.5 forever, and each share is currently worth $135.26. - The firm has one bond outstanding with a coupon rate of 6%, paid semiannually, 10 years to maturity, a face value of $1,000, and a current price of $1,077,95. - Honda's beta is 0.7 , the yleld on Treasury bonds is is 1.5% and the expected return on the market portfolio is 68. - The current stock price is \$41.6. The fim has just paid an annual dividend of $1.2, which is expected to grow by 4% per year. - The firm uses a risk premium of 3% for the bond-yield-plusrisk-premium approach. - New preferred stock and bonds would be issued by private placement, largoly oliminating fotation costs. New equity would come from retained earnings, thus eliminating flotation costs. Part 1 Attempt 3/5 for 10 pts. What is the (pre-tax) cost of debt? Part 2 Attempt 1/5 for 10pts. What is the cost of preferred stock? Correct d rp=PpDp=135.265.5=0.04066 Part 3 Attempt 1/5 for 10 pts. What is the cost of equity uting the CAPM? Correct d rh=rf+(rMrf) What is the cost of equily using the CAPM? Correct rf=rf+(rMrf)=0.015+0.7(0.060.015)=0.0465 Part 4 Attempt 3/5 for 10 pts. What is the cost of equity using the constant grown model? Part 5 Attempt 3/5 for 10 pts. What is the cost of equity using the bond yleid plus risk premium? Part 6 Attempt 1/5 for 10 pts. What is your best guess for the cost of equity it you think all three approaches are equally valid? Part 7 Attempt 2/5 for 10 pts. What is the company's weighted average cost of capital