Question 6 (Cost of Capital-Calculation)

Assuming that Foggy Futures Weather Forecasters is in the 40% tax bracket. The optimal capital

structure is listed below:

Source of Capital: Long-Term Debt = 25%, Preferred Stock

= 20% and Common Stock = 55%

Debt: The firm can issue $1000 par value, 8% coupon interest bonds with a 20 year

maturity date. The bond has an average discount of $30 and flotation costs of

$30 per bond. The selling price is $1000.

Preferred Stock: The firm can sell preferred stock with a dividend that is 8% of the current

price. The stock costs $95. The cost of issuing and selling the stock is

expected to be $5 per share.

Common Stock: The firm's common stock is currently selling for $90 per share. The firm

expects to pay cash dividends of $7 per share next year. The dividends have

been growing at 6%. The stock must be discounted by $7 and flotation costs

are expected to amount to $5 per share.

Retained Earnings: The firm expects to have enough retained earnings in the coming year to be

used in place of any new stock being issued.

What is Foggy Futures Weather Forecasters:

a. cost of debt

b. cost of preferred stock

c. cost of common stock

d. cost of retained earnings and

e. using rounded whole percent for the various costs and weighted costs, what is the weighted average

cost of capital based on the optimal capital structure?