Reference no: EM133015506

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.

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%