What is the after tax cost of debt for Foggy Futures Weather Forecasters? The firm is in the 40% tax bracket. The optimal

capital structure is listed below:

Source of Capital Weight

Long-Term Debt 25%

Preferred Stock 20%

Common Stock 55%

Debt:

The firm can issue $1,000 par value, 8% coupon interest bonds with a 20-year

maturity date. The bond has an average discount of $30 and flotation costs of

$30 per bond. The selling price is $1,000. (New Price = Selling Price-Discount-Flotation cost)

PreferredStock:

The firm can sell preferred stock with a dividend that is 8% of the current price.

The stock costs $95. The cost of issuing and selling the stock is expected to be

$5 per share.

CommonStock:

The firms common stock is currently selling for $90 per share. The firm expects

to pay cash dividends of $7 per share next year. The dividends have been

growing at 6%. The stock must be discounted by $7, and flotation costs are

expected to amount to $5 per share.

RetainedEarnings:

The firm expects to have enough retained earnings in the coming year to be used

Question 5Answer

a.

7.5%

b.

5.13%

c.

12.2%

d.

3.6%

Clear my choice