Concept explainers
Calculation of individual costs and WACC Dillon Labs has asked its
Debt The firm can sell for $1,020 a 10-year, $1,000-par-
Preferred stock An 8% (annual dividend) preferred stock having a par value of $100 can be sold for $98. An additional fee of $2 per share must be paid to the underwriters.
Common stock The firm’s common stock is currently selling for $59.43 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.70 ten years ago to the $4 dividend payment that the company just recently made. If the company wants to issue new common shares, it will sell them $1.50 below the current market value to attract investors, and the company will pay $2 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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