Calculation of Individual costs and WACC

 

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Show transcribed image text Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 45% long-term debt 25% preferred stock, and 30% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 30%. Debt The firm can sell for $955 a 14-year, $ 1,000-par-value bond paying annual interest at a 9.00% coupon rate. A flotation cost of 2% of the par value is required in addition to the discount of $45 per bond. Preferred stock 8.50% (annual dividend) preferred stock having a par value of $100 can be sold for $75. An additional fee of $6 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $90 per share. The dividend expected to be paid at the end of the coming year (2016) is $3.59. Its dividend payments, which have been approximately 70% of earnings per share in the past 5 years, were as shown in the following table: IE7 It is expected that to attract buyers, new common stock must be underpriced $8 per share, and the firm must also pay $3.50 per share in flotation costs. Dividend payments are expected to continue at 70% of earnings. (Assume that r = rg.) The after-tax cost of debt using the bond's yield to maturity (YTM) is %. (Round to two decimal places.) The cost of preferred stock is %. (Round to two decimal places.) The cost of retained earnings is %. (Round to two decimal places.) The cost of new common stock is %. (Round to two decimal places.) Using the cost of retained earnings, the firm's WACC is %. (Round to two decimal places.) Using the cost of new common stock, the firm's WACC is %. (Round to two decimal places.)