Question: P0 $65.00 D0 $2.53 g 9% Flotation cost for common 12% Ppf $42.00 Dpf $3.32 Flotation cost for preferred 10% Bond maturity 25 Payments per

P0 $65.00

D0 $2.53

g 9%

Flotation cost for common 12%

Ppf $42.00

Dpf $3.32

Flotation cost for preferred 10%

Bond maturity 25

Payments per year 2

Annual coupon rate 15%

Par $1,000.00

Bond price $1,271.59

Tax rate 20%

Beta 1.2

Market risk premium, RPM 5.5%

Risk free rate, rRF 7.0%

Target capital structure from debt 40%

Target capital structure from preferred stock 10%

Target capital structure from common stock 50%

Calculate the cost of each capital componentin other words, the after-tax cost of debt, the cost of preferred stock (including flotation costs), and the cost of equity (ignoring flotation costs). Use both the CAPM method and the dividend growth approach to find the cost of equity.

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