Question #$2$

A firm has determined its optimal capital structure which is composed of the following sources

and target market value proportions.

Debt: The firm can sell a $10-$year, $$1,000$ par value, $10$ percent bond for $$960.$ A flotation cost of

$2$ percent of the face value would be required in addition to the discount of $$40.$

Preferred Stock: The firm has determined it can issue preferred stock at $$75$ per share par value.

The stock will pay a $$10$ annual dividend. The cost of issuing and selling the stock is $$2$ per share.

Common Stock: A firm's common stock is currently selling for $$22$ per share. The dividend

expected to be paid at the end of the coming year is $$1\mathrm{.}75.$ Its dividend payments have been

growing at a constant rate for the last four years. Four years ago, the dividend was $$1\mathrm{.}25.$ It is

expected that to sell, a new common stock issue must be underpriced $$2$ per share in floatation

costs. Additionally, the firm's marginal tax rate is $25$ percent.

$$ You are required to cal culate the weighted average cost of capital of the firm.