Long-term debt 30%.

Finch Interiors PLC inch Interiors started as a small furniture business, making wooden dining tables, ents. Finch operated as a private limited company for seven years before going public in 2014. It is listed on the Alternative Investment Market (AIM), a part of the London Stock Exchange dedicated to small and medium enterprises. As Finch is a relatively young company, its management monitors financial per- formance, including the firm's cost of capital, very closely. Larry Finch, the CFO of the firm, keeps a check on the individual cost of Finch's three sources of finance. Finch has raised its capital via long-term debt, preference shares, and ordinary shares. The target capital structure for Finch is given by the weights in the following table: Weight 50% Source of capital Ordinary shareholder's equity Long-term debt Preference shares Total 20% 100% Under current market conditions, Finch can issue 20-year bonds with a face value of 1,000 each that pays a 10% annual coupon interest rate. The issue will re- quire, on average, a discount of 40 per bond and a flotation cost of 34 per bond at sale. The corporate tax rate for Finch is 20%. The outstanding preference shares of Finch pay a dividend of 9% and has a 96-per-share par value. The cost of issu- a ing additional preference share is expected to be 8 per share. As Finch is expecting significant growth that will require capital infusion, it does not pay any dividend to ordinary shareholders. In order to track the cost of or- dinary share capital, Larry uses capital asset pricing model (CAPM). It has been esti- mated that the appropriate risk-free rate is 5% and the market's expected return is 12% for Finch. Using past data, the beta for Finch is estimated to be 1.4. Larry is considering changing the current weight of preference shares in the cap- ital structure by replacing them with debt to create a capital structure with 50% or- dinary shareholders' equity and 50% debt. Larry is also aware that by increasing the proportion of debt, the beta of Finch will go up to 1.6. ] Ea s