You are an investment manager at Securities Investment Plc$.,$ and you are advising the management of Microprocessors Limited, a manufacturer of microchips, on its capital structure. The following information is available to assist with your assessment. The firm:

i$.$ issued $10\%$ preferred share which sold for $$100$ per share par value. The cost of issuing and selling the stock was $$2$ per share.

ii$.$ has common share with a market price of $$25$ per share and an expected dividend of $$2$ per share at the end of the coming year. Growth rate in dividends has been $5\%.$

iii. can borrow funds by selling $$1,000$ par value at $10\%$ coupon interest rate, $10-$year debt. To sell securities$,$ an average discount of $$30$ per bond is given. Assume that the tax rate is $35\%.$

iv$.$ has the following capital structure which it considers optimal.

Type of Capital Book Value $

Long term debt $3000000$

Preferred stock $500000$

Common stock $1200000$

Total $$4700000$

A$.$ Determine the:

i$.$ Before$-$ and after$-$tax cost of debt $(4$ marks$)$ ii$.$ Cost of preferred stock $(2$ marks$)$ iii. Cost of common stock $(2$ marks$)$ iv$.$ Weighted Average Cost of Capital $(4$ marks$)$

B$.$ The firm has a beta of $1\mathrm{.}4.$ The market return equals $12\%$ and the risk$-$free rate of return is $7\%.$ Determine the firm$$s cost of common equity using the CAPM approach. $(2$ marks$)$

C$.$ Explain why cost of capital is measured on the after$-$tax basis. $(2$ marks$)$

D$.$ Why is using a weighted average cost of capital recommended rather than the cost of specific funds to determine a firm$$s cost of capital? $(4$ marks$)$