What Is the Cost of Debt for Foggy Futures Weather

question 41

Multiple Choice

What is the cost of debt for Foggy Futures Weather Forecasters? The firm is in the 40% tax bracket. The optimal capital structure is listed below: ? $$\begin{array} { | l | l | } \hline \text { S ource of Capital } & \text { W eight } \\\hline \text { Long-Term Debt } & 25 \% \\\hline \text { Preferred Stock } & 20 \% \\\hline \text { Common Stock } & 55 \% \\\hline\end{array}$$ ? $\begin{array}{|l|l|}\hline \text { Debt: }&\begin{array}{ll}\text {The firm can issue \( \$ 1,000 \mathrm{p} \) ar value, \( 8 \% \) coupon interest bonds with a 20 -year }\\\text {maturity date. The bond has an average discount of \( \$ 30 \) and flotation costs of }\\\text { \( \$ 30 \) per bond. The selling price is \( \$ 1,000 \) .}\end{array}\\\hline \text {Preferred Stock: }&\begin{array}{ll}\text {The firm can sell preferred stock with a dividend that is \( 8 \% \) of the current price. }\\\text { The stock costs \( \$ 95 \) . The cost of issuing and selling the stock is expected }\\\text {to be \( \$ 5 \) per share. }\end{array}\\\hline \text {Common Stock: }&\begin{array}{ll}\text {The firm's common stock is currently selling for \( \$ 90 \) per share. }\\\text {The firm's common stock is currently selling for \( \$ 90 \) per share. The firm expects to pay cash dividends }\\\text { The dividends have been growing at \( 6 \% \) . The stock must be discounted by \( \$ 7 \) , }\\\text {and flotation costs are expected to amount to \( \$ 5 \) per share. }\end{array}\\\hline \text { Retained Earnings:}&\begin{array}{ll}\text { The firm expects to have enough retained earnings in the coming year to be used}\\\text { in place of any new stock being issued. }\end{array}\\\hline \end{array}$

• A) 5.18%
• B) 3.6%
• C) 7.5%
• D) 12.2%

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