Question 4

A construction company has asked its chief financial officer to measure the

cost of each specific form of capital as well as its weighted average cost of

capital. The weighted average cost is measured using the following weights;

40% long-term debt, 10% preferred stock and 50% common stock equity. The

companys tax rate is 40%.

Debt: Company sells $980, a 10 year, $1,000 par value bond that pays a 10%

coupon rate annually. Floatation cost is $35 of the per value and the bond is

sold at discount of $20 per bond,

Preferred Stock: 8% preferred stock with par value of $100 is sold at $65 per

share. In addition, the company has to pay an underwriting fee of $2 per

share.

Common stock: The current market value of the common stock is $50 per

share. Next year, the dividend (2020) is $4 per share. Its dividend payments,

which have been approximately 60% of earnings per share in each of the last

five years.

If the company decides to issue a new common equity, then the company

must pay the underpriced costs of $5 per share and floatation costs of $3 per

share.

Based on the information above, Calculate:

a. The after tax cost of debt

b. The cost of common stock

c. The cost of new common stock

d. The cost of preferred stock

e. The weighted average cost of capital