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The Imaginary Products Co. currently has debt with a market value of $250 million outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments) which have a maturity of 15 years and are currently priced at $983.90 per bond. The firm also has an issue of 2 million preferred shares outstanding with a market price of $20. The preferred shares pay an annual dividend of $1.20. Imaginary also has 14 million shares of common stock outstanding with a price of $20.00 per share. The firm is expected to pay a $2.20 common dividend one year from today, and that dividend is expected to increase by 5 percent per year forever. If Imaginary is subject to a 40 percent marginal tax rate, then what is the firm’s weighted average cost of capital?
a. Debt=?
b. Preferred equity=?
c. Common equity=?
d. The best method to use when estimating a firm’s discount rate is the=? capital asset pricing model. or weighted avg cost of capital approach
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