Question: The capital structure for ABC Co. is 50% debt, 10% preferred stock, 40% equity. ABC has 20-years to maturity bonds with a $1,000 par value,

The capital structure for ABC Co. is 50% debt, 10% preferred stock, 40% equity.

ABC has 20-years to maturity bonds with a $1,000 par value, Net proceeds of $990 and 8% annual coupon interest rate. Tax 40%.

Outstanding preferred stock pays an 8% dividend and has a $100-per-share par value.

ABC does not currently pay a dividend to common stockholders.

In order to track the cost of common stock the CFO uses the capital asset pricing model (CAPM). The CFO and the firms investment advisors believe that the appropriate risk-free rate is 3% and that the markets expected return equals 11%. Beta is 1.3.

a.Calculate ABCs current after-tax cost of long-term debt.

b.Calculate ABCs current cost of preferred stock.

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