CellU the company CompU is looking at purchasing has a
CellU, the company CompU is looking at purchasing, has a target capital structure of 80% debt, 5% preferred stock, and 15% equity. CellU can raise $1.5 million in debt by issuing 12% mortgage bonds (before tax). Flotation costs for debt are 1% of the $1,000 par value. Preferred stock has a fixed 13% dividend rate. The firm can sell their preferred stock for the par value of $100 minus a 5% flotation cost. The firm paid a common stock dividend of $2.50 last year and has a constant growth rate of 8%. Flotation costs for common stock are 15% of the current stock price of $18. The firm’s current retained earnings are $300,000, and the firm’s marginal tax rate is 40%.
a. What is the after-tax cost of debt?
b. What is the cost of preferred stock?
c. What is the cost of retained earnings?
d. What is the cost of new common stock?
e. What is the weighted average cost of capital using retained earnings?
f. What is the weighted average cost of capital using new common stock?

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