Problem 21-01

HBM, Inc has the following capital structure:

Assets	$	350,000		Debt	$	87,500
				Preferred stock		17,500
				Common stock		245,000

The common stock is currently selling for $13 a share, pays a cash dividend of $0.50 per share, and is growing annually at 4 percent. The preferred stock pays a $7 cash dividend and currently sells for $85 a share. The debt pays interest of 7.0 percent annually, and the firm is in the 30 percent marginal tax bracket.

1. What is the after-tax cost of debt? Round your answer to two decimal places.

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2. What is the cost of preferred stock? Round your answer to two decimal places.

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3. What is the cost of common stock? Assume that the current $0.50 dividend grows by 4 percent during the year. Round your answer to two decimal places.

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4. What is the firms weighted-average cost of capital? Round your answer to two decimal places.

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