Cost of capitalBigtime Coffee is considering a number of strategic acquisitions and thus, needs to determine its costofcapital.ThefirmsCFO,MyronGordon,gatheredthefollowingdata:The only debt securities the firm has outstanding are 25,000 of its original 10year, 8% couponbonds, which are paid semiannually and have a par value of $1,000; currently, the bonds have 8years until maturity and are selling at a price of $1,085;The firm has 1.6 million preferred shares outstanding, currently priced at $10.00, and is offeringan annual (preferred) dividend of $1.65;There are also 3.2 million shares of common stock outstanding, currently priced at $19.00/share;the company just paid a $1.25 dividend, which is expected to increase by 5%, annually (forever).Note that Bigtime Coffee pays floatation costs (i.e., commissions) of 3% of the price on all newly issuedsecurities (including bonds),andthecompanysmarginal tax rate is 30%.a) WhatisBigtimeCoffeesaftertax cost of debt?b) Whatisthecompanyscostofpreferredstock?c) Using the CFOsfavorite model,calculatethefirmscost of common equity.d) ComputeBigtimeCoffeesaftertax weighted average cost of capital.
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