Question 1:

Below is the condensed 2020 balance sheet for Alpha Incorporated (in thousands of dollars).

	2020
Current Assets	$2,000
Net Fixed Assets	$3,000
Total Assets	$5,000
Account Payables and Accruals	$900
Short-term Debt	$120
Long-term Debt	$1,180
Common Stock	$1,450
Retained Earnings	$1,350
Total Common equity	$2,800
Total Liabilities and Equity	$5,000

Alphas earnings per share last year were $3.20. The common stock sells for $55.00, last years dividend was $2.10, and a flotation cost of 10% would be required to sell new common stock. Financial analysts are projecting that the common dividend will grow at an annual rate of 9%. The firms before-tax cost of debt is 10%, and its marginal tax rate is 25%. The firms currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Alphas beta is 1.516. The firms total debt, which is the sum of the companys short-term debt and long-term debt, equals $1.3 million.

Address the following:

1. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity.

2. Now, calculate the cost of common equity from retained earnings using the CAPM method.

3. What is the cost of new common stock based on the CAPM?

4. If Alpha continues to use the same market-value capital structure, what is the firms WACC?