Reference no: EM132584098

A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions.

Debt: The firm can sell a 14-year, $1,000 par value, 8 percent bond for $960. A flotation cost of 2 percent of the face value would be required. Additionally, the firm's marginal tax rate is 40 percent.

Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $4 per share.

Common Stock: A firm's common stock is currently selling for $20 per share. The dividend expected to be paid at the end of the coming year is $1.80. Its dividend payments have been growing at a constant rate for the last four years. It is expected that to sell, a new common stock issue must be underpriced $2 per share in floatation costs. Growth rate 4%

Question 1: Calculate the firm's weighted average cost of capital assuming the firm has exhausted all retained earnings. (Use cost of issuing new common stock)