John company is interested in measuring its overall cost of capital. Current investigation has…

John company is interested in measuring its overall cost
of capital. Current investigation has gathered the following data.
The firm is in the 40% tax bracket.

John company can raise debt by selling $1000 par value,
8% coupon interest rate, 20 years bonds on which annual interest
payments will be made. to sell the issue, an average discount of
$30 per bond would have to be given. The firm also must pay a
floatation cost of $30 per bond.

The firm can sell 8% preferred stock at its $95 per
share par value. The cost of issuing and selling the preferred
stock is expected to be $5 per share. Preferred stock can be sold
under these terms.

The firm’s common stock is currently selling for $90 per
share. The firm expects to pay cash dividends of $7 per share next
year. The firm’s dividends have been growing at an annual rate of
6%, and this growth is expected to continue into the future. The
stock must be underpriced by $7 per share, and the floatation costs
are expected to amount to $5 per share. The firm can sell new
common stock under these terms.

When measuring this cost, the firm does not concern
itself with the tax bracket or brokerage fees of owners. It expects
to have available $100,000 of retained earnings in the coming year;
once these retained earnings are exhausted, the firm will use new
communication stock as the form of common stock equity
financing.

Answer the following questions:

a) Calculate the after-tax cost of debt. (7
Marks)

b) Calculate the cost of preferred stock. (5
Marks)

c) Calculate the cost of new common stock. (10
Marks)

d) Calculate the firm’s weighted average cost of capital
using retained earnings and the capital structure weights shown in
the table above. (8 Marks)

e) Define the cost of capital and the three important
aspects of cost capital to capital structure (