TRM Consulting Services currently has the following capital structure:

New debt would mature on June 30, 2051, have a coupon rate of 7%, and would be sold for their par value of $1,000. The bonds pay interest semiannually, and flotation costs would be 2% of the selling price. The bonds would be issued on June 30, 2021.

The preferred stock pays a $6 dividend each year and is currently valued at $75 per share. Flotation costs on preferred would be 4% of the price. The common stock, which can be bought for $35, has experienced a 6% annual growth rate in dividends and is expected to pay a $1.65 dividend next year. Flotation costs on new common equity would be 8%. The stock has a beta of 1.25, the risk-free rate is 3%, and the expected market risk premium is 6%. In addition, the firm expects to generate $150,000 of retained earnings. Assume that TRM’s marginal tax rate is 25%.

a. Set up a worksheet with all of the data from the problem in a well-organized input area.

b. Calculate the book-value weights for each source of capital.

c. Calculate the market-value weights for each source of capital.

d. Calculate the component costs of capital (i.e., debt, preferred equity, retained earnings, and new common equity). Use the Yield function (see page 311) when finding the after-tax cost of debt. Use the CAPM to find the cost of retained earnings, and the constant growth model for new common equity.

e. Calculate the weighted average costs of capital using both the market-value and book-value weights with retained earnings and also new common equity.

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Source Common Stock Preferred Stock Debt Book Value $ 25,000,000 5,000,000 8,600,000 Quantity 1,250,000 100,000 8,600