Add Page Chart Shape Moda Comment A firm's CEO has set the company's target capital structure as 50% long-term debt, 10% preferred stock, and 40% common stock equity. The firm's marginal corporate tax rate is 23 percent. To finance its planned capital expenditures, the firm is looking at the following sources of capital: Debt: The fim can sell a 20-year, $1,000 par value bond that pays an 8% coupon, with interest paid sem-annually, for $960. To Issue the bond, the firm will have to pay $20 In flotation costs per bond. Preferred Stock: The firm can sell 8% preferred stock at a par value of $100 per share. The cost of Issuing and selling the preferred stock is $5 per share. Common Stock: A firm's common stock is currently selling for $55 per share. This year, the firm paid $5 in dividends per share. The firm's dividends have been growing at a constant rate of 3% per year for the last four years and are expected to sustain this growth rate thereafter. New common stock Issue: If the firm decides to issue new common stock, its underwriter indicated that the issue will have to be underpriced by $3 below the current share price. Further, the firm will have to pay $2 per share in flotation costs. a) Find the firm's before-tax cost of debt financing (2 points) par value- 1000 price of bond-960 flotation cost-20 proceeds received-960-20-940 number of coupon payments 20x240 semiannual coupon 1000x08/2-40 Before tax cost of debtw 8.64% b) Find the firm's after-tax cost of debt financing (2 points) 20 Zoom Add Page Insert Table Chart Text b) Find the firm's after-tax cost of debt financing (2 points) Shape Media Comment tax rate - 23 after tax cost of debt = 8.64(1-23)-6.65% I c) Find the firm's cost of preferred stock financing (2 points) par value of preferred stock: 100 dividend - 100x 0.08-8 flotation cost 5 cost of preferred = 8/(100-5) = 8.42% d) Find the firm's cost of financing using the retained earnings (2 points) Price: 55 dividend-5 Browth rate 03 9 d) Find the firm's cost of financing using the retained eamings (2 points) Price-55 un didend- 5 growth rate-.03 I Cost of retained earnings- 5x{1,03)/55+.03-12.36% c) Find the film's cost of financing using a new common stock issue 12 points) f) Find the firm's weighted average cost of capital, if the firm uses debt, preferred stock and retaining camnings to finance its investments. Given this result, explain what rate of return the firm should require from its investments (2.5 points) 2) Find the firm's weighted average cost of capital, if the firm uses debt, preferred stock, retaining earnings, and new stock issue to finance its investments. Given this result, explain what rate of return the firm should require from its investments (2.5 points) x Add Page Chart Shape Moda Comment A firm's CEO has set the company's target capital structure as 50% long-term debt, 10% preferred stock, and 40% common stock equity. The firm's marginal corporate tax rate is 23 percent. To finance its planned capital expenditures, the firm is looking at the following sources of capital: Debt: The fim can sell a 20-year, $1,000 par value bond that pays an 8% coupon, with interest paid sem-annually, for $960. To Issue the bond, the firm will have to pay $20 In flotation costs per bond. Preferred Stock: The firm can sell 8% preferred stock at a par value of $100 per share. The cost of Issuing and selling the preferred stock is $5 per share. Common Stock: A firm's common stock is currently selling for $55 per share. This year, the firm paid $5 in dividends per share. The firm's dividends have been growing at a constant rate of 3% per year for the last four years and are expected to sustain this growth rate thereafter. New common stock Issue: If the firm decides to issue new common stock, its underwriter indicated that the issue will have to be underpriced by $3 below the current share price. Further, the firm will have to pay $2 per share in flotation costs. a) Find the firm's before-tax cost of debt financing (2 points) par value- 1000 price of bond-960 flotation cost-20 proceeds received-960-20-940 number of coupon payments 20x240 semiannual coupon 1000x08/2-40 Before tax cost of debtw 8.64% b) Find the firm's after-tax cost of debt financing (2 points) 20 Zoom Add Page Insert Table Chart Text b) Find the firm's after-tax cost of debt financing (2 points) Shape Media Comment tax rate - 23 after tax cost of debt = 8.64(1-23)-6.65% I c) Find the firm's cost of preferred stock financing (2 points) par value of preferred stock: 100 dividend - 100x 0.08-8 flotation cost 5 cost of preferred = 8/(100-5) = 8.42% d) Find the firm's cost of financing using the retained earnings (2 points) Price: 55 dividend-5 Browth rate 03 9 d) Find the firm's cost of financing using the retained eamings (2 points) Price-55 un didend- 5 growth rate-.03 I Cost of retained earnings- 5x{1,03)/55+.03-12.36% c) Find the film's cost of financing using a new common stock issue 12 points) f) Find the firm's weighted average cost of capital, if the firm uses debt, preferred stock and retaining camnings to finance its investments. Given this result, explain what rate of return the firm should require from its investments (2.5 points) 2) Find the firm's weighted average cost of capital, if the firm uses debt, preferred stock, retaining earnings, and new stock issue to finance its investments. Given this result, explain what rate of return the firm should require from its investments (2.5 points) x