Century Distribution Company is planning a $100 million expansion of its chain of discount service stations to several neighboring parishes

Century Distribution Company is planning a $100 million expansion of its chain of discount service

stations to several neighboring

parishes

.

This expansion will be financed as follows:

D

ebt issued with a coupon interest rate of 15 percent. The

bonds

have a 10

-

year maturity and a $1,000

face value, and they will be sold to net

Century

$990 after issue costs.

Century’s

marginal tax rate is

25

percent.

15% preferred stock having a par value of $100 can be sold for $95.00. An additional fee of $7.00 per

share must be paid to the underwriters.

Century’s

common stock pays a dividend of $2 per share. New shares can be sold to net $14 per share.

Century’s

dividends are expected to

increase at an annual rate of 5 percent for the foreseeable future.

Century

’s capital

structure is

made up

as follows:

Debt

$

20

000,000

Preferred stock

5

000,000

Common equity

75

000,000

(b)

Calculate:

i. Cost of debt (after tax)

(

6

marks)

ii. Cost of preferred stock

(4 marks)

iii. Cost of common stock

(

4

marks)

iv. Weighted Average Cost of capital for

Century

Ltd.

(

6

marks)