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Financial Management 2. Please show all workings. thank you.

Question #2 A. Explain what is meant by the cost of capital'. (2 marks) B. Mbappe Ltd has asked its financial managers to measure the cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 25% preferred stock and 35% common stock. The firm's tax rate is 25%. Debt The firm can sell for $850 a 10-year, $1000 par value bond paying annual interest at 20% coupon rate. To obtain the selling price a flotation cost of 5% of the par value was required in addition to a discount of $100 per bond. Preferred Stock 12% preferred stock having a par value of $100 can be sold for $98.00. An additional fee of $2.00 per share must be paid to the underwriters. Common Stock The firm's common stock is currently selling for $90 per share. The dividend expected to be paid at the end of the year is $9.00. Its dividend has grown constantly at 10% for the last few years and it is expected that, to sell more stock, new common stock must be under-priced by $10 per share and the firm must also pay $5 per share in flotation costs. Calculate: i. Cost of debt (after tax) ii. Cost of preferred stock iii. Cost of common stock iv. Weighted Average Cost of capital for Mbappe Ltd. (8 marks) (4 marks) (6 marks) (5 marks) (Total 25 marks) Question #1 G. Modric Ltd sells bonds on the market. It has just sold a new issue of 20-year bonds with an 9% coupon rate and realizes net proceeds (after issue costs) of $980 for each $1 000 face value bond. During the same period Modric Ltd sold a 8 % Preferred Stock issue, having a par value of $120, at a price of $140. Issue costs amounted to $10 per share. The risk free rate is 6%; the expected return on the market portfolio is 11 %; and the beta for the company's stock is 1.40. Assume a tax rate of 30%. The company's optimal capital structure is: Debt 25%; Preferred Stock 10%; Common Stock 65% Required: i. What is the after-tax cost of debt? (5 marks) ii. What would be the cost of the preferred stock? (4 marks) iii. Calculate the cost of equity. (3 marks) iv. Calculate the weighted average cost of capital WACC