Use the following information to answer questions 9-1 to 9-5:

You have determined the following costs of capital:

After-tax cost of debt: 6%

Cost of preferred stock 10%

Cost of retained earnings 14%

Cost of new stock 15%

The firm expects to have $700,000 in additions to retained earnings in the coming year and its optimal capital structure is 5% preferred, 25% debt, and 70% common equity.

9-1. Calculate the weighted average cost of capital using retained earnings for the equity component.

9-2. Calculate the weighted average cost of capital using newly issued common stock

for the equity component.

9-3. Calculate the equity break point.

9-4. The expected return on the market is 15%, the risk-free rate is 5%, and the beta for

Alpha Corporation is 1.3. What is your estimate of the cost of retained earnings using the CAPM approach?

9-5. Alpha Corporation pays dividends that are expected to increase at a constant growth rate. The expected dividend in one year is $2.00, the current price of the stock is $22, and the expected growth rate of dividends is 5%. What is your estimate of the cost of retained earnings using the dividend growth model?