Intro

Lumber Corp's common stock trades at a price of $50.51 per share. The most recent dividend was $1.37 per share and it is expected to grow by 4% per year. Flotation costs for common stock have been estimated at 6%, while bonds and preferred stock are sold in private placements and have negligible flotation costs.

The company's preferred stock is selling at $88.75 and has an annual dividend of $4.

Lumber Corp. has bonds outstanding with an average coupon rate of 12% and an average yield to maturity of 9%.

The firm's optimum capital structure is 40% equity, 20% preferred stock and 40% debt, and its tax rate is 32%.

Attempt 1/3 for 10 pts.

Part 1

What is the (after-tax) cost of debt?

Correct

The before-tax cost of debt is the interest rate on new bonds, which is equal to the average yield to maturity on the existing bonds.

0.0612

Part 2

What is the cost of preferred stock?

0.04507

Part 3

What is the cost of retained earnings?

Part 4

What is the cost of new common stock?

Part 5

What is the weighted average cost of capital, assuming the company doesn't have to issue any new common stock?