Question
Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data. The firm is in the 21% tax
Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data. The firm is in the 21% tax bracket.
Debt: The firm can raise debt by selling $1,000-par-value, 8% coupon interest rate, 11-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $40 per bond would have to be given. The firm also must pay flotation costs of $20 per bond.
Preferred stock: The firm can sell 6.5% preferred stock at its $90-per-share par value. The cost of issuing and selling the preferred stock is expected to be $6 per share. Preferred stock can be sold under these terms.
Common stock: The firm's common stock is currently selling for $75 per share. The firm expects to pay cash dividends of $8 per share next year. The firm's 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 $6 per share, and flotation costs are expected to amount to $ 7 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 $150,000 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. For parts f and g below, assume that the capital structure weights for the firm are as shown in the following table:
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