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.
Answer to a
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 %
Answer to b
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 %
Answer to c
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 %
Answer to d
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 %
Answer to e
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 %
Answer to e1
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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