Aaron’s Rentals has 45,000 shares of common stock outstanding at a market price of $27 a share. The common stock just paid a $1.10 annual dividend and has a growth rate of 3.2 percent. There are 10,000 shares of 5.5 percent preferred stock outstanding at a market price of $48 a share. The preferred stock has a par value of $100. The outstanding bonds mature in 11 years, have a total face value of $800,000, a face value per bond of $1,000, and a market price of $987.60 each. The bonds pay 7.5 percent interest, semiannually. The tax rate is 35 percent.1. What are the pre-tax cost of debt and after-tax cost of debt?2. What are the capital structure weights for common stock and debt?3. What is the firm’s weighted average cost of capital?
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