Refer to the following information:

A firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions:

Source of Capital Target Mkt Proportions

Long-term debt 25%

Preferred stock 15%

Common stock equity 60%

DEBT: The firm has 9.5 percent coupon, $1,000 par value bonds outstanding that are currently selling for $1,067. They will mature in 10 years.

PREFERRED STOCK: The firm has determined that it can issue preferred stock at $100 per share. The stock will pay a $12.00 annual dividend. The cost of issuing and selling the preferred stock is $3 per share.

COMMON STOCK: A firms common stock is currently selling for $55 per share. The last dividend paid was $5.50. Dividends have been growing at a constant rate of 4.5 percent. Flotation costs for common stock are $2.75 per share.

Additionally, the firm has a marginal tax rate of 40 percent. The firm also expects to have $1,500,000 of retained earnings available to reinvest in the coming year.

What is the firm's before-tax cost of debt?

A.0.27%

B.9.50%

C.9.92%

D.8.48%

What is the firm's after-tax cost of debt?

A.5.09%

B.3.39%

C.5.95%

D.3.97%

What is the firm's cost of preferred stock?

A.12.00%

B.12.37%

C.9.00%

D.3.00%

What is the firm's cost of retained earnings?

A.14.50%

B.14.95%

C.15.03%

D.15.50%

What is the firm's cost of a new issue of common stock?

A.14.95%

B.14.50%

C.15.50%

D.15.03%

What is the firm's weighted average cost of capital up to the point when retained earnings are exhausted?

A.12.10%

B.12.43%

C.12.95%

D.14.95%

What is the firm's cost of capital after all of the retained earnings have been exhausted?

A.12.95%

B.12.43%

C.14.95%

D.12.10%

At what level of total new financing will the firm exhaust its retained earnings?

A.$2,500,000

B.$1,500,000

C.$600,000

D.$900,000