W. Sharpe, Inc. has a target capital structure that calls for 40% debt, 10% preferred stock and 50% common equity. The firms yield to maturity on its bonds is currently 9%, and it can sell as much debt as it wishes at this rate. The firms preferred stock pays a dividend of $8 per share and the firm will get $67.80 per share from the sale of new preferred stock. Sharpe expects to retain $40,000 in earnings over the next year. Sharpes common stock currently sells for $70 per share. The firm just paid a dividend of $4.00 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 8% per year. The firms tax rate is 40%.

PT 1). What is the firms cost of equity?

a. 12.50% b. 13.40%

c. 14.17% d. 16.15%

PT 2). What is the firms cost of preferred stock?

a. 10.0% b. 11.8%

c. 14.0% d. 12.5%

PT 3). What is the firms after-tax cost of debt?

a. 4.0% b. 6.0%

c. 5.4% d. 3.6%