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Do Homework - Cristian Clementi - Google Chrome Secure | https://www.mathxl.com yerHomework.aspx?homeworkId=448577574&questionld; = 1 &flushed; = false&cld;=4704237&centerwin; =yes FIN-350-MWF1230A-Fundamentals of Business Financs Cristian Clementi 12/4/17 1:34 PM Homework: Module 7: Chapter 9 Score: 0 of 5 pts P9-16 (similar to) Save 7 of 8 (0 complete HW Score: 0%, 0 of 40 pts Question Help Cost of capital Edna Recording Studios, Inc, reported earnings available to common stock of $5,000,000 last year. From those earnings, the company paid a cividend of $1.22 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 25% debt, 10% preferred stock and 65% common stock. It is taxed at a rate of 35%. a. It the market price of the common stock is $30 and dividends are expected to grow at a rate ot 8% per year for the foreseeable future, what is the company s cost orreta ned eamings 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 $2.15 dividend preterred stock for a market price of 531 per share. Flotation costs would amount to $6 per share. What is the cost of pveferred stock finsncingg d. The company can issue S1 000-par value. 12% coupon, 11-year bonds hat can be sold for S1 270 each. Flotation costs would amount to $20 per bond. Use the estimation formula to gure the approximate after-tax cost of debt e. What is the WACC? nanang? a. It the market price o the common stock is 530 and dividends are expected to gro at a te of 8% per year for the foreseeable future, the company's cost of retained earnings nancing is %. Round to two decimal places Enter your answer in the answer box and then click Check Answer Clear All Check Answer O Type here to search 1:34 PM 12/4/2017

Explanation / Answer

a) Cost of retaining earnings, ke = D0 x (1 + g) / P + g = 1.22 x (1+ 8%) / 30 + 8% = 12.39%

b) Cost of new common stock kn = D0 x (1 + g) / (P - F) + g = 1.22 x 1.08 / (30 - 5) + 8% = 13.27%

c) Cost of preferred stock, kps = D / (P - F) = 2.15 / (31 - 6) = 8.60%

d) Cost of debt, kd = (C + (F - P) / n) / (F + P) / 2 = (120 + (1000 - 1290) / 11) / (1000 + 1290) / 2 = 8.18%

After-tax cost of debt, kd x (1 - tax) = 8.18% x (1 - 35%) = 5.32%

e) WACC = wd x kd x (1 - tax) + wps x kps + we x ke

= 25% x 5.32% + 10% x 8.60% + 65% x 13.27% = 10.81%

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