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Cowboy Corporation is estimating its WACC. The firm's debt structure contains: (1) 30,100 long-term bonds with an 8.1% coupon, paid semiannually, a 10 years-to-maturity, and a $1000 face-value which sells for $1200; (2) 20,200 callable long-term bonds with an 4.6% coupon, paid semiannually, a 15 years-to-maturity, an 8-year call protection, an 8.1% call premium, and a $1000 face-value which sells for $850; and (3) 2000, 20-years-to-maturity, zero-coupon bonds that sell for 40% of par with a par of $25,000. The firm also has 500,000 shares of preferred stock which sells at $120 per share, and pays a 10 percent (of $100 par) annual dividend. Cowboy's common stock, which will be paid a dividend of $4.00 next year, sells for $80.00 per share. Common dividends are expected to grow at a rate of 7 percent per year. Cowboy has 2,000,000 common shares outstanding. The firm's marginal tax rate is 35 percent.
A. What are costs of debt, preferred stock, and equity components of capital?
B. What is Cowboy's WACC
explain and illustrate how the Lm curve is derived.
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