Calculation of individual costs and WACC Lang Enterprises is interested in measuring
its overall cost of capital. Current investigation has gathered the following data.
The firm is in the 40% tax bracket.
Debt The firm can raise debt by selling $1,000-par-value, 8% coupon interest
rate, 20-year bonds on which annual interest payments will be made. To sell the
issue, an average discount of $30 per bond would have to be given. The firm also
must pay flotation costs of $30 per bond.
Preferred stock The firm can sell 8% preferred stock at its $95-per-share par
value. The cost of issuing and selling the preferred stock is expected to be $5 per
share. Preferred stock can be sold under these terms.
Common stock The firm’s common stock is currently selling for $90 per share. The
firm expects to pay cash dividends of $7 per share next year. The firm’s dividends
have been growing at an annual rate of 6%, and this growth is expected to continue
into the future. The stock must be underpriced by $7 per share, and flotation costs
are expected to amount to $5 per share. The firm can sell new common stock under
these terms.
