Reference no: EM132620207

Assume Eternalife Company has the following capital structure, which it considers to be optimal: debt 30%, preferred stock 20%, and common stock 50%. The company's tax rate is 30%. Investors expect earnings and dividends to grow at a constant rate of 10% in the future. Eternalife Company paid a dividend of Br. 4.50 per share last year and its stock currently sells at a price of Br. 50 per share.

Five-year treasury bonds yield 5%, the market risk premium is 4%, and Eternalife beta is 1.2. The following terms would apply to new security offerings.

Common Stock: New common equity will be raised only by retaining earnings.

Preferred stock: New preferred stock could be sold to the public at a price of Br.100 per share, with a dividend of Br.10, and floatation costs of Br.5 would be incurred.

Debt (bond): Debt could be sold at an interest rate of 10%.

Required:

i) Find the component costs of debt, preferred stock and common stock

ii) Determine the Weighted average cost of capital (WACC) of the company.