I am looking for help with the last portion of this problem in e . Using the cos
ID: 2769186 • Letter: I
Question
I am looking for help with the last portion of this problem in e .
Using the cost of common stock, the firm's WACC is __%
Cost of capital Edna Recording Studios, Inc., reported earnings available to common stock of $4,200,000 last year. From those earnings, the company paid a dividend of $1.25 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 30% debt, 25% preferred stock, and 45% common stock. It is taxed at a rate of 30%. a If the market price of the common stock is $42 and dividends are expected to grow at a rate of 9% 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 S5 per share, what is the company's cost of new common stock financing? c. The company can issue $2.16 dividend preferred stock for a market price of $29 per share. Flotation costs would amount to S4 per share. What is the cost of preferred stock financing? d. The company can issue $1,000-par-value, 6% coupon, 9-year bonds that can be sold for $1250 each. Flotation costs would amount to $20 per bond. Use the estimation formula to figure the approximate after-tax cost of debt financing? e. What is the WACC? d. If the company can issue $1,000-par-value, 6% coupon, 9-year bonds that can be sold for $1,250 each and flotation costs would amount to $20 per bond, using the estimation formula, the approximate after-tax cost a debt mancing is 2.16 % Round to two decimal places.) e, Usin g the cost of retained earnings, , the finn s WACC.-is 832 % (Round to two decimal places ) Using the cost of new common stock, r the firm's WACC, 1s Pa (Round to two decimal places.) Enter your answer in the answer box, then click Check AnswerExplanation / Answer
Cost of common stock, Ke = [Next dividend / (Stock price - floatation cost)] + Growth rate
= [$1.25 / $(42 - 5)] + 0.09 = ($1.25 / $37) + 0.09 = 0.0338 + 0.09 = 0.1238 = 12.38%
Cost of preferred stock, Kp = [Preferred dividend / (Stock price - floatation cost)]
= $2.16 / $(29 - 4) = $2.16 / $25 = 0.0864 = 8.64%
Pre-tax cost of debt = YTM
= [Annual coupon / {Face value - (Bond price - Floatation)} / Years] / [{(Face value + (Bond price - Floatation)} / 2]
= [$60 + $(1,000 - (1,250 - 20) / 9] / $[(1,000 + (1,250 - 20)] / 2
= [60 - (230 / 9)] / [2,230 / 2]
= (60 - 25.56) / 1,115
= 34.44 / 1,115
= 0.0309 = 3.09%
After-tax cost of debt, Kd = YTM x (1 - tax rate) = 3.09% x (1 - 0.3) = 3.09% x 0.7 = 2.16%
So, WACC using cost of common stock =
Ka = Ke x Proportion of common stock + Kp x Proportion of preferred stock + Kd x Proportion of debt
= 12.38% x 45% + 8.64% x 25% + 2.16% x 30%
= 5.57% + 2.16% + 0.65%
= 8.38%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.