P0 $50.00 Par $1,000.00 D0 $3.13 Bond price $1,171.59 g 7% Tax rate 25% Flotation cost for common 10% Beta 1.2 Ppf $32.61 Market risk premium, RPM 6.0% Dpf $3.30 Risk free rate, rRF 6.5% Flotation cost for preferred 8% Target capital structure from debt 45% Bond maturity 20 Target capital structure from preferred stock 5% Payments per year 2 Target capital structure from common stock 50% Annual coupon rate 12% a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock (including flotation costs), and the cost of equity (ignoring flotation costs). Use both the the CAPM method and the dividend growth approach to find the cost of equity. Cost of debt: N = 40 PMT = $60.00 PV = -$1,171.59 FV = $1,000.00 Semiannual yield = RATE = Annual B-T rd = B-T rd (1 T) = A-T rd 0% = Cost of preferred stock (including flotation costs): Dpf / Net Ppf = rpf = Cost of common equity, dividend growth approach (ignoring flotation costs): D1 / P0 + g = rs Cost of common equity, CAPM: rRF + b RPM = rs =

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