Question #$2$: IBM has the following capital structure, which it considers to be optimal:

Debt $=$$$25,000$

Preferred Stock $$15,000$

Common Equity $=$$$60,{000}_{?}$

IBM's expected net income this year is $$34,285\mathrm{.}72,$ its established dividend payout ratio is $30\%,$ its federal$-$plus$-$state tax rate is $40\%,$ and investors expect earnings and dividends to grow at a constant rate of $9\%$ in the future. IBM last dividend was $$3\mathrm{.}60$ per share and its stock currently sells for $$54$ per share.

IBM can obtain new capital in the following ways:

Preferred: New preferred stock with a dividend of $$11$ can be sold to the public at a price of $$95$ per share.

Debt: $,$ Debt can be sold at an interest rate of $12$ percent.

a$.$ Determine the cost of each capital component.

Cost of Debt: $q,$

Cost of

$q,$

Cost of

Common

Preferred:

$q,$

Stock:

b$.$ Calculate WACC

c$.$ IBM has the following investment opportunities that are average$-$risk projects for the firm:

$\backslash$table$[[$Project$,$Cost at $t=0,$Rate of Return$],[$A$,$$$40,000,17\%$