Question

# Edna Recording​ Studios, Inc., reported earnings available to common stock of ​\$4,400,000 last year. From those​...

Edna Recording​ Studios, Inc., reported earnings available to common stock of ​\$4,400,000 last year. From those​ earnings, the company paid a dividend of ​\$1.33 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 35​% ​debt, 20​% preferred​ stock, and 45​% common stock. It is taxed at a rate of 40​%.

a. If the market price of the common stock is \$50 and dividends are expected to grow at a rate of 6​% per year for the foreseeable​ future, what is the​ company's cost of retained earnings financing​ ___% ? (Round to two decimal​ places.)

b.If underpricing and flotation costs on new shares of common stock amount to ​\$7 per​ share, what is the​ company's cost of new common stock financing​  ___%? (Round to two decimal​ places.)

c.The company can issue \$1.99 dividend preferred stock for a market price of ​\$26 per share. Flotation costs would amount to ​\$2 per share. What is the cost of preferred stock financing​___%? (Round to two decimal​ places.)

d.The company can issue ​\$1,000​-par-value, 11​%​coupon, 9​-year bonds that can be sold for ​\$1,150 each. Flotation costs would amount to ​\$40 per bond. Use the estimation formula to figure the approximate​ after-tax cost of debt​ financing ___% ? (Round to two decimal​ places.)

What is the WACC​?
e- Using the cost of retained earnings, rr , the firm's WACC, ra, is ___%. (Round to two decimal​ places.)
e1- Using the cost of new common stock, rn, the firm's WACC, ra is ___%. (Round to two decimal​ places.)

PLEASE, Could you answer A, B, C, D , E, E1 clearly like A= x% , B= x% , thank you.

Last Dividend Paid (D0) = \$ 1.33

Market Price of Share (P) = \$ 50

Constant Growth Rate of Dividend (G) = 6%

Now, Cost of Retained Earnings Financing = {D0 (1=G)/ P} + G

Cost of Retained Earnings Financing = {1.33 (1.06) / 50} + 0.06

Cost of Retained Earnings Financing = 8.8196 %

Now we have floattaion Cost (F) = \$ 7

Using the same inputs as above Above

Last Dividend Paid (D0) = \$ 1.33

Market Price of Share (P) = \$ 50

Constant Growth Rate of Dividend (G) = 6%

Now, Cost of New Equity Financing = {D0 (1=G)/ (P-F)} + G

Cost of New Equity Financing = {1.33 (1.06) / (50-7)} + 0.06

Cost of New Equity Financing = 9.2786 %

Preference Share Dividend (Pd) = \$ 1.99
Preference Share Price (Pm) = \$ 26

Floatation Cost of Preference Share (Fp) = \$ 2

Therefore Cost of Prefered Stock Financing = Pd/(Pm - Fp)

Cost of Prefered Stock Financing = 1.99/(26-2)

Cost of Prefered Stock Financing = 8.2197 %

We have Market Price of Bond = \$ 1150

Floatation Cost of Bond = \$ 40

Net Proceeds of the bond = Market Price - Floatation Cost

Net Proceeds of the bond (P) = \$ 1150 - \$ 40 = \$ 1110

Now Par value of the bond (F) = \$ 1000

Coupon Rate = 11%

Coupon Amount (C) = Coupon Rate x Par Value of the Bond

Coupon Amount (C) = 11% * 1000 = \$ 110

No. of Years till maturity (N) = 9 years

Now Yield to Maturity of the Bond = {C+(F-P)/N}/(F+P)/2

Yield to Maturity of the Bond = {110 + (1000 - 1110)/9}/(1000 + 1110)/2

Yield to Maturity of the Bond = 9.268 %

After Tax Cost of Debt Financing = YTM x (1- Tax Rate)

After Tax Cost of Debt Financing = 9.268 % * (1-0.40)

After Tax Cost of Debt Financing = 5.5608 %

WACC = Weighted average cost of Capita

WACC = Weight of Debt x After Tax Cost of Debt + Weight of Preference Shares x Cost of Preference Financing +  Weight of Equity Shares x Cost of Equity Financing

Therefore we have

 Cost % (A) Weights (B) Cost x Weights Debt Financing 5.5608 35% 1.95 Prefered Stock Financing 8.2197 20% 1.64 Retained Earnings Financing 8.8196 45% 3.97 Total is WACC 7.56

Therefore the firms WACC is 7.56 %

WACC = Weighted average cost of Capita

WACC = Weight of Debt x After Tax Cost of Debt + Weight of Preference Shares x Cost of Preference Financing +  Weight of Equity Shares x Cost of Equity Financing

 Cost % (A) Weights (B) Cost x Weights Debt Financing 5.5608 35% 1.95 Prefered Stock Financing 8.2197 20% 1.64 Equity Financing 9.2786 45% 4.18 Total is WACC 7.77

Therefore the firms WACC is 7.77 %

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