Its current operations are expected to add $500,000 to retained earnings during the coming year. Its current debt, originally issued at par, has a 6% coupon rate, maturity of 10 years, market price of $864.10, and pays interest semiannually. The current preferred stock (30,000 shares outstanding) carries a dividend of $6.00 per share and is selling in the market at $81.50 per share. GB’s common stock (220,000 shares outstanding) is selling in the market at $45 per share. The company just paid a common stock dividend of $2.50 per share. The dividends are expected to grow at 4% per year for the foreseeable future. GBG’s overall tax rate is 35%. GBG can sell new common stock at current market price with a flotation cost of 5%, new preferred stock with a dividend of $6/share to net $80 per share, and new semiannual coupon bonds (Par value $1,000) with 20 year maturity and a 9.5% coupon to net $957.10. Assume that the current market-based capital structure is optimal.

What percent of new financing must come from equity funds?

a. 29.58%

b. 13.95%

c. 56.48%

d. 100.00%

What is the after-tax cost of debt?

a. 4.87%

b. 6.50%

c. 7.50%

d. 9.78%

e. 10.00%

What is the after-tax cost of preferred stock?

a. 4.87%

b. 6.50%

c. 7.50%

d. 9.78%

e. 10.00%

What is the after-tax cost of retained earnings?

a. 6.50%

b. 8.58%

c. 9.78%

d. 9.95%

e. 10.08%

What is the after-tax cost of new equity?

a. 6.50%

b. 8.58%

c. 9.78%

d. 9.95%

e. 10.08%

What is the average after-tax cost of all equity funds?

a. 6.50%

b. 8.58%

c. 9.78%

d. 9.95%

e. 10.08%