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Question - Lang Enterprise is interested in measuring its overall cost of capital. Current investigation has gathered the following data. The firm is in the 40 percent tax bracket.
Debt: The firm can raise debt by selling $1,000 par value, 8 percent coupon interest rate, 20-years bonds on which annual interest payments will be made. The bonds are predicted to sell at $940 upon issued.
Preferred stock: The firm can sell 8 percent 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. Preferred stock can be sold under these terms.
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 percent 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 can sell new common stock under these terms.
Required - Based on the information given above, determine the firm's weighted average cost of capital using the capital structure weights shown in the following table.
Source of Capital Weight
Long-Term Debt 30%
Preferred Stock 20%
Common Stock Equity 50%
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