Problem 1 A) Calculate the cost of capital given the following information:

Tax rate = 40%.

15-year, 12% coupon, semiannual payment noncallable bonds sell for $1,153.72. New bonds will be privately placed with no flotation cost.

10%, $100 par value, quarterly dividend, perpetual preferred stock sells for $111.10.

Common stock sells for $50. D0 = $4.19 and g = 5%.

beta = 1.2; risk-free rate = 7%; required return on the market = 13%.

Bond-Yield Risk Premium = 4%.

Target capital structure: 30% debt, 10% preferred, 60% common equity.

B) If a new common stock issue incurs a flotation cost of 15% of the proceeds, and the firm plans to issue new stock, how will the WACC estimate change?