. Farm Implement, Inc. is evaluating its Weighted Average Cost of Capital (WACC) to prepare for an upcoming facility expansion project. The current market value of the firms capital structure is as follows:

Type of Financing	Market Value (in thousands)
Debt	$750
Preferred Stock	$120
Common Stock	$1,200
Total:	$2,070

The companys outstanding debt has a pre-tax interest cost of 7.5%. The company uses the discounted cash flow approach to determine the cost of equity (i.e., the Gordon constant growth stock valuation model). Farm Implements common stock currently trades at $125 per share. The year-end dividend ( D₁ ) is expected to be $2.50 per share, and the dividend is expected to grow forever at a constant rate of 5% per year. The companys effective tax rate is 28%. The firms preferred stock pays an annual dividend of $1.75 and has a current market value of $28.00.

Calculation of the cost of each of Farm Implements sources of financing:

1. What is Farm Implements after-tax cost of debt financing?

2. What is Farm Implements cost of preferred stock financing?

3. What is the cost of Farm Implements new common stock equity financing?

d. What is Farm Implements current Weighted Average Cost of Capital (WACC), based on the cost of each type of financing that you calculated on page 8, and the market value weight proportions of the firms current capital structure, based on the table on page 8 of this exam?