Calculate the firm’s weighted average cost of capital.

a. To calculate the firm’s weighted average cost of capital, we need to determine the proportion of each type of financing (bonds, preferred stock, and common stock) in the firm’s capital structure and then multiply it by the cost of each type of financing.

Weighted average cost of capital = (Proportion of bonds * Cost of bonds) + (Proportion of preferred stock * Cost of preferred stock) + (Proportion of common stock * Cost of common stock)

For Nealon, the proportion of bonds is $100,000,000 / ($100,000,000 + $15,000,000 + $20,000,000) = 0.8. The cost of bonds is 8%.

The proportion of preferred stock is $15,000,000 / ($100,000,000 + $15,000,000 + $20,000,000) = 0.1 The cost of preferred stock is 10%.

The proportion of common stock is $20,000,000 / ($100,000,000 + $15,000,000 + $20,000,000) = 0.2 The cost of common stock is 15%.

Therefore, the firm’s weighted average cost of capital is: Weighted average cost of capital = (0.8 * 8%) + (0.1 * 10%) + (0.2 * 15%) = 6.4% + 1% + 3% = 10.4%

b. To calculate the cost of equity capital when new shares are sold, we can use the Capital Asset Pricing Model (CAPM) which is the cost of equity = Risk-free rate + Beta * (Market return – Risk-free rate)

Let’s assume the risk-free rate is 4%, the market return is 12%, and the beta of Nealon is 1.2

Cost of equity = 4% + 1.2 * (12% – 4%) = 4% + 1.2 * 8% = 4% + 9.6% = 13.6%

The weighted average cost of the added funds involved in the issuance of new shares is: Weighted average cost of added funds = (Proportion of new common stock * Cost of new common stock)

The proportion of new common stock is $5,000,000 / ($5,000,000 + $100,000,000 + $15,000,000) = 0.03 The cost of new common stock is 13.6% – (13.6%*7%) = 12.6%.

Weighted average cost of added funds = (0.03 * 12.6%) = 0.378%.

Therefore, the weighted average cost of the added funds involved in the issuance of new shares is 0.378%.