Question

Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data.  The firm is in the 30% tax bracket.

DEBT: The firm can raise debt by selling $1,000 par value, 9% coupon interest rate, 17 year bonds on which annual interest payments will be made.  To sell the issue, an average discount of $25 per bond would have to be given. The firm also must pay flotation costs of $15 per bond.

PREFERRED STOCK: The firm can sell 8.5% preferred stok at its $105 per share par value.  the cost of issuing and selling the preferred stock is expected to be $7 per share. Preferred stock can be sold under these terms.

COMMON STOCK:  The firm's common stock is currently selling for $65 per share.  The firm expects to pay cash dividends of $7.5 per share next year.  The firm's dividends have been growing at an annual rate of 8% and this growth is expected to continue into the future.  The stock must be underpriced by $6 per share, and flotation costs are expected to amount to $6 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                                        35%

Preferred Stock 10

Common Stock Equity                               55

Total 100%

Answer 1