1. mature in 1/1/2038 with $1,000 face value. These bonds will pay a 9% coupon rate semiannually and are currently selling for $950. The firm has 100,000 preferred shares of stock outstanding with a book value of $40, but currently selling for $50 per share. The most recent preferred and common dividends were $3.50 and $2.50 per share, respectively. The firms EPS five years ago was $8.00 and it expects to increase its next dividend payment by the implied 5-year earnings per share growth rate. Flotation costs on debt and preferred equity are both 3%, but 7% in the case of common stocks. The common stock is selling today for $25 and the firms tax rate and payout ratio are 40% and 25%, respectively. The firm has 200,000 shares of common stock outstanding with the same book value as that of its preferred stock.

a) Calculate the book value and market value weights for each source of capital.

b) Calculate the component costs of capital (i.e., debt, preferred equity, retained earnings, and new common equity).

1. Determine the weighted average costs of capital using both the market and the book value weights

Fill out the excel sheet below with formula.

Book Value Market Value BV Weights MV Weights 1 Manufacturer 2 Tax Rate 40% 3 Payout Ratio 25% 4 Settlement Date 1/1/18 5 Maturity Date 1/1/2038 6 Frequency 2 7 Face Value $ 1,000 8 Coupon Rate 9.00% 9 Selling Price $950 10 Flotation Costs on Debt and Preferred 3.00% 11 Preferred Dividend $3.50 12 Preferred/Common Stock Book Value $40 13 Preferred Price $50 14 Last Common Dividend (D) $2.50 15 EPS 5 Years Ago $8.00 16 Price on Common Share $25.00 17 Flotation Costs on Common Equity 7.00% 18 19 Source Quantity 20 Common 21 Preferred 22 Debt 23 Totals 24 25 Yield to Maturity 26 After-tax Cost of Debt 27 Cost of Preferred Equity 28 Growth Rate 29 Cost of Retained Earnings 30 Cost of New Common Equity 31 32 Weighted Average Cost of Capital 33 Book Value Weights 34 With Retained Earnings 35 With New Common Equity 36 Market Value Weights 37 With Retained Earnings 38 With New Common Equity 39 Book Value Market Value BV Weights MV Weights 1 Manufacturer 2 Tax Rate 40% 3 Payout Ratio 25% 4 Settlement Date 1/1/18 5 Maturity Date 1/1/2038 6 Frequency 2 7 Face Value $ 1,000 8 Coupon Rate 9.00% 9 Selling Price $950 10 Flotation Costs on Debt and Preferred 3.00% 11 Preferred Dividend $3.50 12 Preferred/Common Stock Book Value $40 13 Preferred Price $50 14 Last Common Dividend (D) $2.50 15 EPS 5 Years Ago $8.00 16 Price on Common Share $25.00 17 Flotation Costs on Common Equity 7.00% 18 19 Source Quantity 20 Common 21 Preferred 22 Debt 23 Totals 24 25 Yield to Maturity 26 After-tax Cost of Debt 27 Cost of Preferred Equity 28 Growth Rate 29 Cost of Retained Earnings 30 Cost of New Common Equity 31 32 Weighted Average Cost of Capital 33 Book Value Weights 34 With Retained Earnings 35 With New Common Equity 36 Market Value Weights 37 With Retained Earnings 38 With New Common Equity 39