You are the CFO of Micro Spinoff Inc. The company has 600,000 shares of common stock outstanding at a market price of $60 a share. Micro Spinoff just paid an annual dividend in the amount of $5.00 per share. The dividend growth rate is 5 percent annually. Micro Spinoff also has 18,000 bonds outstanding with a face value of $1,000 per bond that is selling at 102.4 percent of par. The bonds have a 7.25 percent coupon, pay interest semi-annually, and have 3 years to maturity. Finally, the firm has 75,000 shares of preferred stock outstanding at a market price of $40 a share. Preferred stocks pay dividend of 8 percent on its par value of $10.

The firm is considering a three-year expansion project (same operations as the existing projects of the firm) that requires an initial investment in a machine of $200,000. The increase in Net Working Capital (NWC) at time 0 is $10,000 that will be reduced to normal levels at the end of the project at time 3. The machine has a life of 5 years and will be depreciated to 0 using straight-line method. The Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) in the first year is $80,000 and this will grow at 5 percent a year. At the end of the project (year 3), the machine can be sold for $60,000. The firms tax rate is 21 percent. Find the cost of common equity.

Solve for the cost of preferred stock.

Solve for the before-tax and after tax cost of debt.