What is the cost of debt after tax

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Pico Pica Mexican Foods, Inc determined the following capital structure:

Debt: 45%

Preferred Stock: 5%

Common Stock: 50%

The anticipated capital budget for next year is $2,000,000. The change in retained earnings is estimated to be $600,000. Bonds can be sold to a YTM of 14%. Preferred stock can be sold to a yield of 15%. Common stock, currently valued at $30.00 per share, can be sold to new investors to net the company $28.00. The current dividend is $1.50 per share and the growth rate is estimated at 10%. The tax rate is 36%.

Questions:

  1. What is the cost of debt after tax?
  2. What is the cost of preferred stock after tax?
  3. What is the cost of Ke, externally generated?
  4. What is the cost of Ke, internally generated?
  5. What is the weighted average cost of capital before the break?
  6. What is the weighted average cost of capital after the break?
  7. What size capital budget causes the break?
  8. What is the weighted average cost of capital for discount purposes for a capital budget of $2,000,000?

Reference no: EM132403092

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