## (solution) Source of capital: Weight Long term debt: 30% Preferred Stock:

Source of capital: Weight
Long term debt: 30%
Preferred Stock: 20%
Common Stock Equity: 50%
Total 100%

At the present time, Eco can raise debt by selling 20 year bonds with a \$1,000 par value and a 10.50% annual coupon interest rate. Eco's corporate tax rate is 40% and its bonds
generally require an average discount of \$45 per bond and flotation costs of \$32 per bond when being sold. Eco's outstanding preferred stock pays a 9% dividend and has a
\$95 per share par value. The cost of issuing and selling additional preferred
stock is expected to be \$7 per share. Because Eco is a young firm that requires lots
of cash to grow it does not currently pay a dividend to common stockholders. To track the cost of common stock the CFO uses CAPM. The CFO and the firm's investment advisors believe that the appropriate risk free rate is 4% and that the market's expected return equals 13%. Using data from 2012 to 2015, Eco's CFO estimates the firm's beta to be 1.3. Although Eco's current target capital structure includes 20% preferred stock, the company is considering using debt financing to retire the outstanding preferred stock, thus shifting their target capital structure to 50% long term and 50% common stock equity. If Eco shifts its capital mix from preferred stock to debt, its financial advisors
expect its beta to increase to 1.5.

To Do:

a. Calculate Eco's current after-tax cost of long term debt.

b. Calculate Eco?s current cost of preferred stock.

c. Calculate Eco?s current cost of common stock.

d. Calculate Eco?s current weighted average cost capital. I need help with this one in a spreadsheet

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This question was answered on: Jan 30, 2021

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