Neo Networks Inc. (NNI) is estimating its cost of capital.

Its bonds have a par value of $1,000 and an annual coupon rate of 8%. Interest is paid semiannually. The remaining maturity of bonds is 20 years. The current market price of a bond is $1,100. New issues of bonds will incur issuance costs of 4%.

Its preferred stock has a par value of $100. The firm could sell at par preferred stock with an annual dividend rate of 10%. New issues of preferred stocks will incur flotation costs of 6%.

NNIs beta is 1.2, the risk-free rate is 5 percent, and the market risk premium is 6 percent. The dividends of NNI are expected to grow at a rate of 4% in perpetuity. Last year it paid a dividend of $2.00 per share. Its current share price is $27.00 per share. New issues will have flotation costs of 5%.

The firm's marginal tax rate is 40 percent. NNIs management wishes to maintain a long-term target capital structure of 20 percent debt, 10 percent preferred stock, and 70 percent common equity.

a. Estimate NNIs' annual before-tax cost of debt.

b. Estimate NNIs cost of preferred stock.

c. What is NNIs cost of common stock using the DCF approach?

d. What is the weighted average cost of capital of NNI?

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