Subject FINANCIAL MANAGEMENT Note: Please Write from a laptop or computer

+ TOPIC Cost of capital ASSIGNMENT DIRECTION & NHD Company is interested in measuring its overall cost of capital. Current investigation REQUIREMENT/S has gathered the following data. The company is in a 40% tax bracket (Identify the ILOs to be assessed at the Debt The firm can raise debt by selling $1,000 par-value, 8% coupon interest rate, 20- end of each year bonds on which annual interest payments will be made. To sell this issue, an requirement. average discount of $30 per bond would have to be given to investors. The company Include the rubric or also must pay flotation costs of $30 per bond. marking scheme for each Preferred Stock: The company can sell 8% preferred stock at its $95 per-share value. item/requirement. The cost of issuing and selling the preferred stock is expected to be $5.00 per share. Common Stock: The company's common stock is currently selling for $90 per share. The firm expects to pay cash dividends of $7.00 per share next year. The firm's dividends have been growing at an annual rate of 6%, and this growth is expected to continue into the future. The stock must be underpriced by $7.00 per share, and flotation costs are expected to amount to $5.00 per share. Retained earnings: when measuring this cost, the firm does not concern itself with the tax bracket or brokerage fees of owners. It expects to have available $100,000 of retained earnings in the coming year, once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing. Q1- Calculate the specific cost of each source of financing - Q2- The firm's capital structure weights used in calculating its weighted average cost of capital are shown in the table below. Source of capital Weight Long term debte 20% Preferred stock 32 0% Common stock equity 50% Total 100% 2 A- Calculate the single break point associated with the firm's financial situation.(Hint: this point results from exhaustion of the firm's retained earnings)- B- Calculate the weighted average cost of capital associated with total new financing below the break point calculated in part (1) C- Calculate the weighted average cost of capital associated with total new financing above the break point calculated in part (1)