source of capital	Target market proportions
long term debt	20%
preffered stock	10
common stock equity	70

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

Debt: The firm can sell a 12-year, $1,000 par value, 7 percent semiannual coupon bond for $950. A flotation cost of 2 percent of the face value would be required. Note: Floatation cost only occurs if new security needs to be offered. Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share. Common Stock: A firm's common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new common stock issue must be underpriced $1 per share in floatation costs. Additionally, the firm's marginal tax rate is 21 percent.

The firm's after-tax cost of existing debt is closest to________. (See Table 9.1). Hint: No need to consider floatation cost.

The weighted average cost of capital up to the point when retained earnings are exhausted (i.e. Do not issue any new security) is closest to________. (See Table 9.1)

If the target market proportion of long-term debt is increased to 30 percent decreasing the proportion of preferred stock to 0 percent, what will be the revised weighted average cost of capital? Assuming all funds will be coming from existing investors and so no floatation cost will occur. (See Table 9.1)