Calculate the after-tax cost of debt

Reference no: EM13256863

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.

PREFERRED STOCK: The firm can sell 8% preferred stok 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.

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.

RETAINED EARNINGS: When measuring this cost, the firm does not have concern itself with the tax racket 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 common stock as the form of common stock equity financing.

a. Calculate the after-tax cost of debt.

b. Calculate the cost of preferred stock.

c. Calculate the cosst of common stock,.

d Calculate the firm's weighted average cost of capital using he capital structure weights shown in teh 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%

Reference no: EM13256863

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