Document1 - Word O X | Page 1 of 10 words REF3 -- TIUITIEWUIK. TTUVIETII DE J. C

ID: 2794336 • Letter: D

Question

Document1 - Word O X | Page 1 of 10 words REF3 -- TIUITIEWUIK. TTUVIETII DE J. CrapIETS I, TU, T1, T2, T3, ATU TU Score: 0 of 15 pts 1 of 9 (8 complete) > HW Score: 73.37%, 73.37 of 100 pts P9-19 (similar to) :EQuestion Help Calculation of individual costs and WACC Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data. The firm is in the 30% tax bracket. Debt The firm can raise debt by selling $1,000-par-value, 5% coupon interest rate, 10-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $40 per bond would have to be given. The firm also must pay flotation costs of $25 per bond. Preferred stock The firm can sell 6% preferred stock at its S95-per-share par value. The cost of issuing and selling the preferred stock is expected to be 56 per share. Preferred stock can be sold under these terms. Common stock The firm's common stock is currently selling for $50 per share. The firm expects to pay cash dividends of $5.5 per share next year. The firm's dividends have been growing at an annual rate of 9%, and this growth is expected to continue into the future. To sell new shares of common stock, the firm must underprice the stock by $5 per share, and flotation costs are expected to amount to $7 per share. The firm can sell new common stock under these terms. Retained earnings When measuring this cost, the firm does not concern itself with the tax bracket or brokerage fees of owners. It expects to have available $100,000 of retained earnings in the coming year, once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing a. Calculate the after-tax cost of debt. b. Calculate the cost of preferred stock. a. The after-tax cost of debt using the approximation formula is %. (Round to two decimal places.) Enter your answer in the answer box and then click Check Answer. 6 parts 6 remaining Clear All Check Answer E O Type here to search I e A O E MI a d») 11/28/2017 6

Explanation / Answer

PART a

FV of bonds = $1000

Coupon = 5% * 1000 = 50

Period = 10 years

PV = 1000-40-25 = $935

Calculating YTM using Rate formula in excel as =RATE(10,50,-935,1000)

= 5.88%

After tax cost of debt = 5.88% *(1-30%) = 4.11%

PART B

Cost of preferred stock = 6%*95/ (95-6)

= 6.4%

PART C

Cost of Equity = (Next Year's Annual Dividend / Current Stock Price) + Dividend Growth Rate

= 5.5/ (50-5-7) + 9%

= 23.47%

PART D

WACC is computed below as 14.99%

Component

Cost

Weight

Cost*Weight

Debt

4.11%

35%

1.44%

Equity

23.47%

55%

12.91%

Preferred stock

6.40%

10%

0.64%

WACC= sum of Cost * weights

14.99%