Calculation of individual costs and WACC Dillon Labs has askod its financial managor to measure the cost of each spocific type of capital as woll as the woighted average cost of capital. The weightod average cost is to be moasurod by using the following weights: 40% long-term debt, 15% preferred stock, and 45% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 28%. Debt The firm can sell for $1015 a 19-year, $1,000-par-value bond paying annual interest at a 9.00% coupon rate. A flotation cost of 2.5% of the par value is required. Preferred stock 7.50% (annual dividend) proferrod stock having a par valuo of $100 can be sold for $98. An additional foo of $5 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 $4.44 dividend payment, Do, that the company just recently made. If the company wants to issue new new common stock, it will sell them S2.50 below the current market price to attract investors, and the company will pay $3.50 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).
Calculation of individual costs and WACC Dillon Labs has askod its financial managor to measure the cost of each spocific type of capital as woll as the woighted average cost of capital. The weightod average cost is to be moasurod by using the following weights: 40% long-term debt, 15% preferred stock, and 45% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 28%. Debt The firm can sell for $1015 a 19-year, $1,000-par-value bond paying annual interest at a 9.00% coupon rate. A flotation cost of 2.5% of the par value is required. Preferred stock 7.50% (annual dividend) proferrod stock having a par valuo of $100 can be sold for $98. An additional foo of $5 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 $4.44 dividend payment, Do, that the company just recently made. If the company wants to issue new new common stock, it will sell them S2.50 below the current market price to attract investors, and the company will pay $3.50 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).
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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Concept explainers
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Question
Transcribed Image Text: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: 40% long-term debt, 15% preferred stock, and 45% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 28%.
Debt The firm can sell for $1015 a 19-year, $1,000-par-value bond paying annual interest at a 9.00% coupon rate. A flotation cost of 2.5% of the par value
required.
Preferred stock 7.50% (annual dividend) preferred stock having a par value of $100 can be sold for $98. An additional fee of $5 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 $4.44 dividend payment, Do, 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 $3.50 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.
a. The after-tax cost of debt using the bond's yield to maturity (YTM) is 12 %. (Round to two decimal places.)
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