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The stock of Gao Computing sells for $50, and last year's dividend was $2.10. A flotation cost of 10% would be required to issue
The stock of Gao Computing sells for $50, and last year's dividend was $2.10. A flotation cost of 10% would be required to issue new common stock. Gao's preferred stock pays a dividend of $3.30 per share, and new preferred stock could be sold at a price to net the company $30 per share. Security analysts are projecting that the common dividend will grow at a rate of 7% a year. The firm can issue additional long-term debt at an interest rate (or a before-tax cost) of 10%, and its marginal tax rate is 35%. The market risk premium is 6%, the risk-free rate is 6.5%, and Gao's beta is 0.83. In its cost-of- capital calculations, Gao uses a target capital structure with 45% debt, 5% preferred stock, and 50% common equity. Calculate the cost of each capital component-in other words, the after-tax cost of debt, the cost of preferred stock (no flotation costs), and the cost of new stock (including flotation costs) using dividend growth model.
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