The Accidental Petroleum Company is trying to determine its weighted average cost of capital for use in making a number of investment decisions. The firm's bonds were issued 6 years ago and have 14 years left until maturity. They carried an 8% coupon rate, and are currently selling for $962.50.
The firm's preferred stock carries a $4.60 dividend and is currently selling at $42.50 per share. Accidental's investment banker has stated that issue costs for new preferred will be 50 cents per share.
The firm has significant retained earnings, but will also need to sell new common stock to finance the projects it is now considering. Accidental Petroleum common stock is expected to pay a $2.50 per share dividend next year, and is expected to maintain an 8% growth rate for the foreseeable future. The stock is currently priced at $50 per share, but new common stock will have flotation costs of 60 cents per share.
1.Calculate the cost of debt, Kd (omit the percent sign and take your answer to two decimal places
2.Calculate the cost of preferred stock, Kp (omit the percent sign and take your answer to two decimal places).
3.Calculate the cost of new common stock, Kn (omit the percent sign and take your answer to two decimal places).
This question was asked on Apr 26, 2010.
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