The Okefonokee Real Deal Company is currently funded with $600 million of the common stock, $500 million of debt, and $100 million of preferred stock. The company believes that this capital structure is optimal and thus these weights represent the company target capital structure. Plans for future expansion for the next five years will require raising $400 million of capital and this capital will be used in the same proportions as the companys current capital structure. The price of a share of stock is currently $25 a share and the last (annual) common stock dividend was $2.50. Common stock dividends are growing at a constant 5% rate. Given this information, you can use the constant growth formula to compute the cost of retained earnings. The company currently has $140 million of retained earnings available for investing in future projects. After running out of retained earnings, new common stock can be raised but the stock price after flotation costs will be $21 per share which will raise the cost of new common equity (see Lesson 3 Part 2, minute 8:00). Preferred stock has a price of $100 and a dividend of $10, and the cost of preferred stock will not change no matter how much is used. Finally, the company can raise $120 million of 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). The tax rate is 40%.

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?