TRM Consulting Services currently has the following capital structure:

Source Book Value Quantity

Common Stock $ $25,000,0001,250,000$

Preferred Stock $5,000,000100,000$

Debt $8,600,0008,600$

New debt would mature on June $30,2047,$ have a coupon rate of $6\mathrm{.}5\%,$

and would be sold for their par value of $$1,000.$ The bonds pay interest

semiannually, and flotation costs would be $2\%$ of the selling price. The

bonds would be issued on June $30,2017.$

The preferred stock pays a $$3$ dividend annually and is currently valued at

$$64\mathrm{.}30$ per share. Flotation costs on preferred would be $4\%$ of the price.

The common stock, which can be bought for $$32\mathrm{.}00,$ has experienced a

$6\%$ annual growth rate in dividends and is expected to pay a $$1\mathrm{.}45$

dividend next year. Flotation costs on new common equity would be $8\%.$

The stock has a beta of $1\mathrm{.}25,$ the risk$-$free rate is $3\%,$ and the expected

market risk premium is $6\%.$

In addition, the firm expects to generate $$150,000$ of retained earnings.

Assume that TRM$$s marginal tax rate is $35\%.$

a$.$ Set up a worksheet with all of the data from the problem in a well$-$

organized input area.

b$.$ Calculate the book$-$value weights for each source of capital.

c$.$ Calculate the market$-$value weights for each source of capital.

d$.$ Calculate the component costs of capital $($i$.$e$.,$ debt, preferred equity,

retained earnings, and new common equity$).$ Use the YIELD function

$($see page $292)$ when finding the after$-$tax cost of debt. Use the CAPM

to find the cost of retained earnings, and the constant growth model

for new common equity.

e$.$ Calculate the weighted average costs of capital using both the market$-$

value and book$-$value weights with retained earnings and also new common equity.