Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the followingdata. The firm is in the 40% tax bracket.

Debt The firm can raise debt by selling $1,000-par-value, 8% coupon interest

rate, 20-year bonds on which annual interest payments will be made. To sell the

issue, an average discount of $30 per bond would have to be given. The firm also

must pay flotation costs of $30 per bond.

Preferred stock The firm can sell 8% preferred stock at its $95-per-share par

value. The cost of issuing and selling the preferred stock is expected to be $5 per

share. Preferred stock can be sold under these terms.

Common stock The firms common stock is currently selling for $90 per share.

The firm expects to pay cash dividends of $7 per share next year. The firms dividends

have been growing at an annual rate of 6%, and this growth is expected to

continue into the future. The stock must be underpriced by $7 per share, and

flotation costs are expected to amount to $5 per share. The firm can sell new

common stock under these terms.

Retained earnings When measuring this cost, the firm does not concern itself

with the tax bracket or brokerage fees of owners. It expects to have available

$100,000 of retained earnings in the coming year; once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing.

a. Calculate the after-tax

b. Calculate the cost of preferred stock.

c. Calculate the cost of common stock.

d. Calculate the firms weighted average cost of capital using the capital structure

weights shown in the following table. (Round answer to the nearest 0.1%.)

CHAPTER 9 The Cost of Capital 383

Source of capital Weight

Long-term debt 30%

Preferred stock 20

Common stock equity 50

Total 100%