a. Calculate the after-tax cost of debt. b. Calculate the cost of preferred stock. c. Calculate the cost of common stock (both retained earnings and new common stock). d. Calculate the WACC for Dillon Labs.
a. Calculate the after-tax cost of debt. b. Calculate the cost of preferred stock. c. Calculate the cost of common stock (both retained earnings and new common stock). d. Calculate the WACC for Dillon Labs.
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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Question
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 weighted average cost of capital. The weighted average cost is to be measured by using the following weights:
retained earnings , new common stock, or both). The firm's tax rate is
40%
long-term debt,
25%
preferred stock, and
35%
common stock equity (26%.
Debt The firm can sell for
$1000
a
15-year,
$1,000-par-value
bond paying annual interest at a
6.00%
coupon rate. A flotation cost of
3%
of the par value is required.7.00%
(annual dividend) preferred stock having a par value of
$100
can be sold for
$92.
An additional fee of
$3
per share must be paid to the underwriters.Common stock The firm's common stock is currently selling for
$60
per share. The stock has paid a dividend that has gradually increased for many years, rising from
$3.00
ten years ago to the
$4.89
dividend payment,
D0,
that the company just recently made. If the company wants to issue new new common stock, it will sell them
$2.50
below the current market price to attract investors, and the company will pay
$2.50
per share in flotation costs. a. Calculate the after-tax cost of debt.
b. Calculate the cost of preferred stock.
c. Calculate the cost of common stock (both retained earnings and new common stock).
d. Calculate the WACC for Dillon Labs.
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