Calculate the cost of common stock and preferred stock

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Reference no: EM131510772

Domelan Van Lines is interested in measuring its cost of capital. They are in a 40% tax bracket and here’s their data: 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 stock at its $95 per share par value. The cost of issuing and selling the preferred stock is expected to be $5 per share. 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 does not expect to utilize retained earnings for new projects.

a. Calculate the after tax cost of debt

b. Calculated the cost of preferred stock.

c. Calculate the cost of common stock

d. Calculate the weighted average cost of capital for Wagner Engineering, assuming that the weights are 30% for long-term debt, 20% for preferred stock, and 50% for common stock.

Reference no: EM131510772

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