Retained Earnings: The firm expects to have $$225,000$ of retained earnings available in

the coming year. Once the firm exhausts these retained earnings, it will use new common stock

as the form of common stock equity financing.

a$.$ Calculate the individual cost of each source of financing $($round to the nearest $0\mathrm{.}1\%).$

b$.$ Calculate the firm's weighted cost of capital $($WACC$)$ assuming the equity financing

comes from retained earnings and using the target weights shown in the following table

$($round to the nearest $0\mathrm{.}1\%).$ Given the target weights, what is the total financing that

Humble Manufacturing can raise from all sources assuming that it exhausts its retained

earnings but does not issue new common stock equity. Next, recalculate the WACC

assuming that the firm has exhausted its retained earnings and must issue new equity

$($common stock$)$ to raise the additional funds.

c$.$ In which, if any, of these investments shown in the following table do you recommend

that the firm invest? Explain your answer. How much new financing is required?

Investment Opportunity

Expected Return $(\%)$ Initial InvestmentHumble Manufacturing is interested in measuring its overall cost of capital. The firm is in the $21\%$tax

bracket. The company's financial analysts have gathered the following data:

Debt: The firm can raise debt by selling $$1,000$ par value, $10\%$ coupon interest rate, $10-$year

bond on which annual interest will be made. When bonds are issued, their market price would be $$970.$

The firm must also pay flotation costs of $$20$ per bond.

Preferred Stock:The firm can sell $11\%($annual dividend$)$ preferred stock at $$100$ per share$-$par

value. Analysts expect the cost of issuing and selling the preferred stock will be $$4$ per share.

Common Stock: The firm's common stock is currently selling for $$80$ per share. The firm

expects to pay cash dividends of $$6$ per share next year. The firm's dividends have been growing at $6\%,$

and this growth will continue in the future. The stock will have to be underpriced by $4\%$ per share, and

flotation costs amount to $$4$ per share.