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 valuc. 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.)
a. What is the after-tax cost of debt, preferred stock and common stock? (4.8%, 10.48%,
12.2%)
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? (9.67%)