E2) Carpetto Technologies is looking to estimate its cost of capital for capital budgeting purposes. Their in-house capital budgeting division has gathered the following information for this purpose: Carpetto currently has 25 year, $1000 par bonds, trading at a price of $967.37. These bonds pay a coupon of 6.8% per year annually. If the firm issues new bonds, it will incur flotation costs of 3% on the bonds. Carpetto's 8.75% annual dividend paying, $100 par preferred stock currently sell in the market at a price of $97 per share. Carpetto will incur a flotation cost of 5% if it issued new preferred stock. Carpetto's common stock sells for $61 per share, its last dividend of $2 which it paid yesterday is expected to grow at a constant rate of 7% per year into the future. New common stock will additionally impose flotation costs of 8% on the firm. Carpetto's beta is 1.6. The firm has estimated the risk-free rate to be 4%, and the market risk premium to be 3.8%. The firm's target capital structure is 25% debt, 15% preferred stock, and 60% common equity. Carpetto has estimated that they will earn about $18 million in net income this year, of which they expect to payout 35% as dividends. The firm's marginal tax rate is 34%. Compute Carpetto's before-tax and after-tax cost of debt. Compute Carpetto's cost of preferred stock. Estimate Carpetto's average cost of internal equity using all the methods possible. Estimate Carpetto's average cost of external equity. Estimate Carpetto's WACC before and after it exhausts all its retained earnings. How much retained earnings does Carpetto have available this year for reinvestment? g) What is the firm's retained earnings breakpoint? a) b) c) d) e) 1)