The stock of IMB Computing sells for $50, and last years dividend was $2.10. A flotation cost of 10% would be required to issue new common stock. IMBs 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 (inclusive of flotation costs). 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 IMBs beta is 0.83. In its cost-of- capital calculations, IMB is funded with $22,500,000 of long-term debt, $25,000,000 of common equity, and $2,500,000 of preferred stock.

Part 1: Component Costs

A) Calculate the after-tax cost of debt. Calculate the cost of preferred stock. Calculate the cost of internal equity. Use both the CAPM method and the dividend growth approach. (10 Points)

Part 2: Capital Structure

B) Calculate the capital structure weights. Calculate the weighted average cost of capital. Calculate the cost of new common stock or external equity. Calculate the weighted average cost of capital for new common stock. (10 Points)