TRM Consulting Services currently has the following

capital structure New debt #3514

TRM Consulting Services currently has the following capital structure:New debt would mature
on June 30, 2040, have a coupon rate of 8%, and would be sold for their par value of $1,000.
The bonds pay interest semiannually, and flotation costs would be 2% of the selling price. The
bonds would be issued on June 30, 2015.The preferred stock pays a $7 dividend annually and
is currently valued at $67.50 per share. Flotation costs on new preferred equity would be 4% of
the price.The common stock, which can be bought for $28.00, has experienced a 6% annual
growth rate in dividends and is expected to pay a $1.60 dividend next year. Flotation costs on
new common equity would be 8%. The stock has a beta of 1.25, the risk-free rate is 3%, and
the expected market risk premium is 7%.In addition, the firm expects to generate $150,000 of
retained earnings. Assume that TRM's marginal tax rate is 35%.a. Set up a worksheet with all of
the data from the problem in a well-organized input area.b. Calculate the book-value weights for
each source of capital.c. Calculate the market-value weights for each source of capital.d.
Calculate the component costs of capital (i.e., debt, preferred equity, retained earnings, and
new common equity). Use the YIELD functions (see page 277) when finding the after-tax cost of
debt. Use the CAPM to find the cost of retained earnings, and the constant growth model for
new common equity.e. Calculate the weighted average costs of capital using both the market-
value and book-value weights with retained earnings and also new common equity.View
Solution:
TRM Consulting Services currently has the following capital structure New debt

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