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Problem: Ajax, Inc. is expecting to issue new 10-year, $1,000 par value bond priced at par with a coupon rate of 6% (annual coupon), and to issue new preferred stock with a $2.00 per share dividend at $20 a share. Common stock is currently selling for $25 a share. Ajax expects to pay a dividend of $2.50 per share next year, and a market analysis indicates dividends will grow at a constant rate of 3% per year. The marginal tax rate is 40%.
Required:
a) Calculate the after-tax cost of debt, the cost of preferred stock and the cost of common stock using the information above.
b) Ajax raises capital using a capital structure of 40% debt, 10% preferred stock and 50% common stock (e.g., market weights), what is the cost of capital for Ajax, Inc.?
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