You are provided the following information on a company. The total market value is $40 million. The capital structure, shown here, is considered to be optimal.

a. What is the after-tax cost of debt? (Assume the company's effective tax rate = 40%)
b. Assuming a $7 dividend paid annually, what is the required return for preferred shareholders (i.e. component cost of preferred stock)? (assume floatation costs = $0.00)
c. Assuming the risk-free rate is 2%, the expected return on the stock market is 9%, and the company's beta is 1.0, what is the required return for common stockholders (i.e., component cost of common stock)?
d. What is the company's weighted average cost of capital(WACC)?

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Accounting Value Market Value Bonds, $1000 par, 6% coupon, 6% YTM Preferred Stock, 7%, $100 par, 100,000 shares $10,000,000 $10,000,000 $8,000,000 $10,000,000 Common Stock, $1 par, 100,000 shares Capital in excess of par Retained Earnings * Total market value of common equity $100,000 $22,000,000 * $400,000 $13,500,000