Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weightedaverage cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 10% preferred stock, and 50% commonstock equity (retained earings, new common stock, or both). The firm's tax rate is 24%.Debt The firm can sell for $1000 a 11-year, $1,000-par-value bond paying annual interest at a 12.00% coupon rate. A flotation cost of 4% of the par value is required.Preferred stock 8.50% (annual dividend) preferred stock having a par value of $100 can be sold for $98. An additional fee of $3 per share must be paid to theunderwriters.Common stock The firm's common stock is currently selling for $80 per share. The stock has paid a dividend that has gradually increased for many years, rising from$2.25 ten years ago to the $4.43 dividend payment, Do. that the company just recently made, if the company wants to issue new new common stock, it will sell them$2.00 below the current market price to attract investors, and the company will pay $4.00 per share in flotation costs.a. Calculate the after-tax cost of debt.b. Calculate the cost of preferred stock.a. The after-tax cost of debt using the bond's yield to maturity (YTM) is 12.13%. (Round to two decimal places.)b. The cost of preferred stock is 8.95%. (Round to two decimal places)c. The cost of new common stock is%. (Round to two decimal places.)d. Using the cost of new common stock, the firm's WACC is%. (Round to two decimal places.)

WACC or weighted average cost of capital = (Weight of debt*After tax cost of debt) + (Weight of…

a. The after-tax cost of debt using the bond's yield to maturity (YTM) is 12.13%. (Round to two decimal places) b. The cost of preferred stock is (8.95 %. (Round to two decimal places) e. The cost of new common stock is%. (Round to two decimal places.) d. Using the cost of new common stock, the firm's WACC is% (Round to two decimal places.)

a. The after-tax cost of debt using the bond's yield to maturity (YTM) is 12.13%. (Round to two decimal places) b. The cost of preferred stock is (8.95 %. (Round to two decimal places) e. The cost of new common stock is%. (Round to two decimal places.) d. Using the cost of new common stock, the firm's WACC is% (Round to two decimal places.)

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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1. The basic WACC equation The calculation of WACC involves calculating the weighted average of the required rates of return on debt, preferred stock, and common equity, where the weights equal the percentage of each type of financing in the firm's overall capital structure. is the symbol that represents the cost of preferred stock in the weighted average cost of capital (WACC) equation. Bryant Co. has $2.7 million of debt, $2.5 million of preferred stock, and $3.3 million of common equity. What would be its weight on common equity? O 0.23 O 0.32 O 0.26 O 0.39
5. You are given the following information for company's Financial: Long-term debt outstanding: Current yield to maturity (r debt): Number of shares of common stock: Price per share: Book value per share: Expected rate of return on stock (requity): a) Computed company's cost of capital. Ignore taxes. $300,000 8% 10,000 $50 $25 15%
what is the after tax ytm? what is the cost of common stock? what is the cost of preferred stock what is the total value of the capital"? what is the rsk free what is the weight of the bond what is weight of the stocks
Assume the firm has a tax rate of 23 percent. c-1. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is Issued. (Do not round Intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) c-2. Calculate the percentage changes in ROE when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round Intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) c-3. Calculate the return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization. (Do not round Intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) c-4. Given the recapitalization, calculate the percentage changes in ROE when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round…
The Five and Dime Store has a cost of equity of 14.8 percent, a pretax cost of debt of 6.7 percent, and a tax rate of 21 percent. What is the firm's weighted average cost of capital if the debt-equity ratio is 467 Multiple Choice O O 10.10% 11.80% 11.53% 13.49% 14.93%
TOPIC WEIGHTED AVERAGE If a company issues common stock and coupon bonds and the debt-to-equity ratio are 0.85, the cost of equity is 12% and the pretax cost of debt is 7%. What is the weight of the company’s equity if the tax rate is 40%?
The outstanding debt of Berstin Corp. has ten years to maturity, a current yield of 6%, and a price of $80. What is the pretax cost of debt if the tax rate is 30%. Note: The current yield of a bond is its annual coupon divided by its price. A. 4.65% B. 6% OC. 6.2% OD. 7.75%
Compute the WACC of a firm that currently has $1 million in debt and $2 million in equity and $1 million in preferred stock. The current yield to maturity on the firms debt is 2%. Equity holders require a 6% return and preferred stock holders require a 3.8% return. The current tax rate that applies to the firm is 30%. Write your answer as a decimal.
2. What is the yield to maturity of this corporate bond assuming that for every payment, including the maturity par value payment, the probability of default is 2% and the loss given default is 45% 1. Coupon $60 2. 10yrs to maturity 3. Cost of $1,035 4. Par value of $1,000
What is the cost of equity based on the dividend growth model? What is the cost of equity based on the security market line? What market weights should be given to the various capital components in the weighted average cost of capital computation What is the weighted average cost of capital using the cost equity calculated based on CAPM?
REQUIREMENTS: 1. How much is the cost of equity using the capital asset pricing model? 2. How much is the cost of equity using the bond plus risk premium?
If a bank has the following ratios, it can pay up to of its earnings as dividends. Tier 1 leverage = 4.7% Tier 1 common equity risk-based = 7.2% %3D Tier 1 risk-based 8.3% Total capital risk-based = 11%

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