Reference no: EM132540071

YG Inc. (YG) is determining its cost of capital for future investment decisions. Management believes that the company's current market value capital structure is optimal, and intends to maintain this structure into the future. Current debt has a coupon rate of interest of 9%, but in the current market, debt with a similar term structure and rating requires an interest rate of 6%. Preferred shares have a par value of $80 and pay a dividend of $8 per year. These preferred shares are currently trading in the market at a price of $45 per share. The current price of YG's common shares is $50 per share, and the company just paid the annual cash dividend of $4 per share. YG expects to increase its dividend by 10% each year into the foreseeable future.

The current market values of the company's debt and equity are as follows:

Debt $8,000,000

Preferred shares $2,000,000

Common equity $10,000,000

• The company's marginal tax rate is 25%.

Question 1: What are YG's after-tax cost of debt and after-tax cost of preferred shares for the purpose of determining the weighted average cost of capital (rounded to the nearest tenth of a percent)?