Cost of capital Edna Recording Studios, Inc., reported earnings available to common stock of $4,600,000 last year. From those earnings, the company paid a dividend of $1.23 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 30% debt, 15% preferred stock, and 55% common stock. It is taxed at a rate of 28%. a. If the market price of the common stock is $43 and dividends are expected to grow at a rate of 5% per year for the foreseeable future, what is the company's cost of retained earnings financing? b. If underpricing and flotation costs on new shares of common stock amount to $7 per share, what is the company's cost of new common stock financing? c. The company can issue $2.07 dividend preferred stock for a market price of $28 per share. Flotation costs would amount to $5 per share. What is the cost of preferred stock financing? d. The company can issue $1,000-par-value, 6% coupon, 8-year bonds that can be sold for $1,150 each. Flotation costs would amount to $30 per bond. Use the estimation formula to figure the approximate after-tax cost of debt financing? e. What is the WACC? a. If the market price of the common stock is $43 and dividends are expected to grow at a rate of 5% per year for the foreseeable future, the company's cost of retained earnings financing is 8 %. (Round to two decimal places.) b. If underpricing and flotation costs on new shares of common stock amount to $7 per share, the company's cost of new common stock financing is 8.59 %. (Round to two decimal places.) c. If the company can issue $2.07 dividend preferred stock for a market price of $28 per share, and flotation costs would amount to $5 per share, the cost of preferred stock financing is 9 %. (Round to two decimal places.) d. If the company can issue $1,000-par-value, 6% coupon, 8-year bonds that can be sold for $1,150 each, and flotation costs would amount to $30 per bond, using the estimation formula, the approximate after-tax cost of debt financing is %. (Round to two decimal places.)
Cost of capital Edna Recording Studios, Inc., reported earnings available to common stock of $4,600,000 last year. From those earnings, the company paid a dividend of $1.23 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 30% debt, 15% preferred stock, and 55% common stock. It is taxed at a rate of 28%. a. If the market price of the common stock is $43 and dividends are expected to grow at a rate of 5% per year for the foreseeable future, what is the company's cost of retained earnings financing? b. If underpricing and flotation costs on new shares of common stock amount to $7 per share, what is the company's cost of new common stock financing? c. The company can issue $2.07 dividend preferred stock for a market price of $28 per share. Flotation costs would amount to $5 per share. What is the cost of preferred stock financing? d. The company can issue $1,000-par-value, 6% coupon, 8-year bonds that can be sold for $1,150 each. Flotation costs would amount to $30 per bond. Use the estimation formula to figure the approximate after-tax cost of debt financing? e. What is the WACC? a. If the market price of the common stock is $43 and dividends are expected to grow at a rate of 5% per year for the foreseeable future, the company's cost of retained earnings financing is 8 %. (Round to two decimal places.) b. If underpricing and flotation costs on new shares of common stock amount to $7 per share, the company's cost of new common stock financing is 8.59 %. (Round to two decimal places.) c. If the company can issue $2.07 dividend preferred stock for a market price of $28 per share, and flotation costs would amount to $5 per share, the cost of preferred stock financing is 9 %. (Round to two decimal places.) d. If the company can issue $1,000-par-value, 6% coupon, 8-year bonds that can be sold for $1,150 each, and flotation costs would amount to $30 per bond, using the estimation formula, the approximate after-tax cost of debt financing 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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I only need to be answered D and E. Since only three questions can be answered at once.
Transcribed Image Text:Cost of capital Edna Recording Studios, Inc., reported earnings available to common stock of $4,600,000 last year. From those earnings, the company paid a dividend of $1.23 on each of its 1,000,000 common shares outstanding. The capital
structure of the company includes 30% debt, 15% preferred stock, and 55% common stock. It is taxed at a rate of 28%.
a. If the market price of the common stock is $43 and dividends are expected to grow at a rate of 5% per year for the foreseeable future, what is the company's cost of retained earnings financing?
b. If underpricing and flotation costs on new shares of common stock amount to $7 per share, what is the company's cost of new common stock financing?
c. The company can issue $2.07 dividend preferred stock for a market price of $28 per share. Flotation costs would amount to $5 per share. What is the cost of preferred stock financing?
d. The company can issue $1,000-par-value, 6% coupon, 8-year bonds that can be sold for $1,150 each. Flotation costs would amount to $30 per bond. Use the estimation formula to figure the approximate after-tax cost of debt financing?
e. What is the WACC?
a. If the market price of the common stock is $43 and dividends are expected to grow at a rate of 5% per year for the foreseeable future, the company's cost of retained earnings financing is 8 %. (Round to two decimal places.)
b. If underpricing and flotation costs on new shares of common stock amount to $7 per share, the company's cost of new common stock financing is 8.59 %. (Round to two decimal places.)
c. If the company can issue $2.07 dividend preferred stock for a market price of $28 per share, and flotation costs would amount to $5 per share, the cost of preferred stock financing is 9%. (Round to two decimal places.)
d. If the company can issue $1,000-par-value, 6% coupon, 8-year bonds that can be sold for $1,150 each, and flotation costs would amount to $30 per bond, using the estimation formula, the approximate after-tax cost of debt financing is %. (Round
to two decimal places.)
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