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Hockey Heaven Inc is considering purchasing a new arena being built in downtown Edmonton, but management wants to know the company's current cost of capital before proceeding. From the recently completed year-end financials, the following is the BOOK VALUE of the company's capital structure: Bonds ($1.000 par each) $12,000,000 Preferred shares (100,000 shares) 2,500,000 Common shares (1,000,000 shares) 8,000,000 Retained earnings 3,000,000 $25,500,000 The long term debt has 15 years to maturity, an 11% coupon (paid annually) and the current bond yield is 10%. A new debt issue would have a flotation cost of 2.0% of the funds raised. The preferred shares are trading at $30/share and have a 9% dividend. A new issue would require a flotation cost of 4%. The company has enjoyed steady growth for the last 4 years, with dividends growing from $0.80 to $1.01 per share (D0 - just paid). The same rate of growth will continue, going forward. The shares are currently trading at 51450 per share. Flotation costs for new common shares would be 8%. Internally generated funds will be sufficient to support future projects The tax rate is 42%. The market value of debt is O$15,081,412 O$12,912,730 O$12,000,000 $8.789.432 The market value of Preferred: $3,000,000 $7,391,825 O$5,000,000 O$6,526,321 The market value of Common Stocks is: O$46,800,000 O$52,000,000 O$64,000,000 O14,500,000 The After-tax cost of debt is: 06.21% 05.6% 04.31% 05.92% The cost of preferred is: 07.81% 05.34% 08.91% 05.42% Growth rate for common is: 04% 06% 06.2% 08% The cost of common equity is: O17.93% O13.38% 08.79% O21.25%

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