The Okefonokee Real Deal Company has plans for future expansion that will require raising $400 million of new capital. The tax rate is 40%. The Company is currently financed with $600 million of the common stock, $500 million of debt, and $100 million of preferred stock.This capital structure is the optimal (target) capital structure for this company. The price of common stock is currently $25 a share. The last (annual) common stock dividend was $2.50 and dividends are growing at a constant 5% rate.The company currently has $140 million of retained earnings available for future projects. New common stock can be raised but its cost (required rate of return) will be 2.5% more than the existing common stock (retained earnings) due to flotation costs. Preferred stock is priced at $100 per share, and has a dividend of $10 per share. The cost (required rate of return) for preferred stock is not expected to change and the company can raise an unlimited amount of preferred stock. The company can raise $120 million of new debt with a before tax cost of 8% and another $100 million of additional debt with a before tax cost of 10% (assume zero flotation costs).

For questions a-d, use the notes from class and the following videos (show your calculations): WACC by Bionic Turtle (9:09), Capital Budgeting: Cost of Equity (11:37) Capital Budgeting: Cost of Debt (7:32), and Capital Budgeting: Cost of Preferred Stock (3:26)

a.What is the cost (required rate of return) of retained earnings?

b.What is the cost (required rate of return) of new common stock?

c.What is the cost of preferred stock?

d.What is the WACC of the first dollar raised of the $400 million of new capital?