P9-17 (similar to) Help costs and WACC Dillon Labs has asked its firancial manag

Question

P9-17 (similar to) Help costs and WACC Dillon Labs has asked its firancial manager to measure the cost of each by using the following weights: 45% long-term debt, 20% preferred stock, and 35% common stock equity dretained oamings, new common stock, or both). The firm's tax rate is 25%. cost is to tm can ser for S950 ateyear S1,000par ate bond pay ng amar nterest at a 700% co pon rate. Anotaion cost of 35% of the par value is required in adition to te discount of S50 per bond. Preferred stock 10.00% (annual dividend) preferred stock having a par vakue of $100 can be sold for $65. An addisional fee of $4 per share must be paid to the underwniters. 60% of earrings per srare in te pasts, s, were as shown in the folowing tatie eamings. (Assume that rr) common stock is curenty selling for $70 per share. The dividend expected to be paid at the end of the coming year (2016) is $3.35. Its dividend payments, which have been new common stock must be underpnced S4 share, and the firm mat aso pay S3.50 per share in nosion costs. Dividend payments are expected to continue at 60% of a. Calculate the ater-tax cost of debt. a. The after wastofdett using the bonds yield to maturity (YTM) is%. Rond to two decimal places ) (Click on the icon copy its contents into a spreadsheet) 52 98 2013 5265 $2.50 2011 Print Done parts Clear All

Explanation / Answer

Dear Student,     Kindly attach screen shots properly next time onwards. Lets understanding the question now. 1) Capital structure of the company is 45% long term debt, 20% preferred stock and 35% equity stock Tax rate = 25% Cost of debt : Debt = $ 950 a 14 year , $ 1000 par value bond with a coupon rate of 7% I.e coupon rate = 7% Flotation coupon rate = 3.5% Total cost of debt = 10.5% Tax rate = 25% After tax cost of debt = 10.5 % ( 1-0.25) = 7.875% Cost of Preferred stock 10% annual rate of stock having par value of $ 100 can sold for $ 65. An additional fees of $4 per share has to paid to underwritters Dividend per share = 100*10% = $ 10 per share Underwritter fees = $ 4 per share Underwritters fee after atx = 4 * 75% = $ 3 per share Total cost of preferred stock per share = 10+3= $ 13 per share cost of preferred stock in percentage = 13/65 *100 = = 20% Dear Studend there is no clarity on third question. Please resubmit it properly 2) a) After tax cost of debt : the given question is same as above question. Numbers also same b) Cost of preferred stock the given question is same as above question. Numbers also same c) Cost of common stock Selling price of common stock = $ 70 per share Dividend = $ 3.35 per share Expected dividend = $ 3.5 per share Expected dividend pay out = 60% EPS= 3.5/60% = 5.833 Expected market price = 70 *96% = 67.2 per share Cost of equity = 5.833/67.2 = 8.68% d) WACC = 7.875 ( 0.45) + 20 (0.20) + 8.68 ( 0.35) = 10.58%

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