the total cost of capital of its operations. The company falls within the 40% tax bracket. During the investigation, the following data was gathered:

Debt: The firm can raise an unlimited amount of debt by selling $1,000-parvalue, 10% coupon interest rate, 10-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $30 per bond must be given. The firm must also pay flotation costs of $20 per bond.

Preferred stock: The firm can sell 11% (annual dividend) preferred stock at its $100-per-share par value. The cost of issuing and selling the preferred stock is expected to be $4 per share. An unlimited amount of preferred stock can be sold under these terms.

Common stock: The firms common stock is currently selling for $80 per share. The firm expects to pay cash dividends of $6 per share next year. The firms dividends have been growing at an annual rate of 6%, and this rate is expected to continue in the future. The stock will have to be underpriced by $4 per share, and flotation costs are expected to amount to $4 per share. The firm can sell an unlimited amount of new common stock under these terms.

Retained earnings: The firm expects to have $225,000 of retained earnings available 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.a. Calculate the specific cost of each source of financing. (Round to the nearest 0.1 %.) b. The firm uses the weights shown in the following table, which are based on target capital structure proportions, to calculate its weighted average cost of capital. (Round to the nearest 0.1 %.)

Source of Capital	Weight
Long-term debt	40%
Preferred Stock	15
Common stock Equity	45
Total	100

(1) Calculate the single break point associated with the firms financial situation.

(Hint: This point results from exhaustion of the firms retained earnings.)

(2) Calculate the weighted average cost of capital associated with total new financing below the break point calculated in part (1).

Weighted Average Cost of Capital for Ranges of totalnew financing of Briggs & Stratton manufacturingRange of total new financing.

(3) Calculate the weighted average cost of capital associated with total new financing above the breakpoint calculated in part (1).

c. Define cost of capital and explain the key assumptions made relating to risk in isolate the basic structure of the cost of capital.

d. Explain why the cost of capital is measured on an after-tax basis why is use of a weighted average cost of capital rather the cost of the specific source of funds recommended?

e. Explain briefly five methods used to evaluate capital investment projects