Larry, Chief Financial Officer of HTML Corporation, just hired you as a Finance Manager to review the capital structure of the company and estimate its cost of capital.

An extract of the capital structure on the Statement of Financial Position of HTML Corporation for the year ended December 31, 2019 is shown as below:

Statement of Financial Position Bonds (semi-annual 6% coupon rate, $1,000 par, 10 years to maturity) Preferred stock ($100 par, 6% dividend) Common stock ($8 par)

Total ($) 3,000,000 900,000 784,000 4,684,000

Market prices per bond/share are $840 for bonds, $96 for preferred stock, and $14 for common stock respectively.

Dividends just paid for common stock were $2.80 per share last year and are projected to have an annual growth rate of 5% indefinitely. The firm is in a 34% tax bracket.

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Question A2 (continued)

Required:

(a) Based on the financial statement, the annual interest expense per bond is $60 and the market price is $840. Therefore, Larry concludes that our cost of debt is obviously $60 / $840 = 7.14%. Do you agree with his estimation? Explain your answer within 150 words. (6 marks)

2. (b) Based on the above data, Larry argues that It costs us $2.80 dividend per share to use shareholders fund last year. The cost of common stock should be $2.80 (1+5%) / $14 = 21% this year. Besides, this cost is also the same regardless of using internal equity or issuing public shares. Do you agree with Larrys conclusion? Explain your answer within 150 words. (5 marks)

3. (c) Compute HTMLs weighted average cost of capital (WACC).