Laurier Company has 25,000 bonds outstanding. The bonds are selling at 97% of face value, ($1,000) have an 7% coupon rate, pay interest semi-annually and yielding 9%. There are 200,000 shares of $8 (dividend) preferred stock outstanding with a current market price of $68 a share. In addition, there are 1.05 million shares of common stock outstanding with a market price of $74a share and a beta of 1.24 . The common stock will pay $6.36 in dividends next year and it is expected expects to grow by 4% annually. The firm's marginal tax rate is 35%. The stock market risk premium is 9% and the Treasury bill rate is 3.5%. 1. What is the cost of equity based on the dividend growth model? (3 marks) 2. What is the cost of equity based on the security market line? Explain any difference with (1). (4 marks) 3. What is the cost of financing using preferred stock? (3 marks) 4. What is the after-tax cost of debt financing? (2 marks) 5. What is the weighted average cost of capital? Interpret your answer (4 marks)
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