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Calculation of individual costs and WACC Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data. The firm is in the 40% tax bracket. Debt The firm can raise debt by selling $1,000-par-value, 8% coupon interest rate, 20-year 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 flotation costs of $30 per bond.
Common stock 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 flotation costs are expected to amount to $5 per share. The firm can sell new common stock under these terms.
- a. Calculate the after-tax cost of debt.
- b. Calculate the cost of preferred stock.
- c. Calculate the cost of common stock.
- d. Calculate the firm’s WACC using the capital structure weights shown in the following table. (Round answer to the nearest 0.1%.)
Source of capital | Weight |
Long-term debt | 30% |
Preferred stock | 20 |
Common stock equity | 50 |
Total | 100% |
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