Question

Lippo In. reports the following capital structure on its balance sheet: Debt $ 20 m, Preferred stock $ 10 m, Common stock $ 20 m The debt has 10 years to maturity, carries a coupon rate of 6%, and sells at 86.58% of face value. The preferred shares have a face value of $100 each and pay an annual dividend of $11. They sell at $105 each. There are 1 million shares of common stock with a market price of $30 each. The stock has a beta of 1.2. The risk-free rate is 5%. Assume that the risk premium on the market portfolio is 6%. The tax rate is 40%. (Assume that flotation costs are negligible and bond coupons are paid annually.)
a. What is the after-tax cost of debt, preferred stock and common stock?
b. What is the weighted average cost of capital for the firm, if the current capital structure based on market values is the optimal capital structure?

Answer 1

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