Question

1. The capital structure for Mills Corporation is shown below. Currently, flotation costs are 13% of market value for a new bond issue and $3 per share for preferred stock. The dividends for common stock were $2.50 last year and have an estimated annual growth rate of 6%. Market prices are $1,050 for bonds, $20 for preferred stock, and $40 for common stock. Assume a 34% tax rate. Financing Type % of Future Financing Bonds (8%, $1k par, 16 year maturity) 36% Common equity 45% Preferred stock (5k shares outstanding, $50 par, $1.50 dividend) 19% Total % 100%

Compute the company’s WACC.

Answer #1

(Individual or Component Costs of Capital) Compute the cost for
the following
sources of Financing:
a. A bond that has a $1,000 par value (face value) and a contract
or coupon
interior rate of 12%. A new issue would have a flotation cost of 6%
of the
$1,125 market value. The bonds mature in 10 years. The firm’s
average tax
rate is 30% and its marginal tax rate is 34%.
b. A new common stock issue paid a $1.75 dividend...

Cost of capital
Edna Recording Studios, Inc., reported earnings available to
common stock of $4,000,000 last year. From those earnings, the
company paid a dividend of $1.15 on each of its 1,000,000 common
shares outstanding. The capital structure of the company includes
35% debt, 15% preferred stock, and 50% common stock. It is
taxed at a rate of 27%.
a. If the market price of the common stock is $40 and dividends
are expected to grow at a rate of...

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...

1. (Cost of Debt) CougarCo has the option to issue 15-year bonds
at $1,300 flotation cost of 7% and a coupon rate of 6% (paid
annually) with a face value of $1,000. What is CougarCo firm’s cost
of debt prior to tax?
2. (Cost of Preferred Stock) The preferred stock of CougarCo
will sell for $43.37 and pay a $3.75 dividend. The net price of the
security after flotation costs will be $39.28. What is the cost of
capital for...

Edna Recording Studios, Inc., reported earnings available to
common stock of
$4 comma 400 comma 0004,400,000
last year. From those earnings, the company paid a dividend
of
$1.251.25
on each of its
1 comma 000 comma 0001,000,000
common shares outstanding. The capital structure of the company
includes
2525%
debt,
2020%
preferred stock, and
5555%
common stock. It is taxed at a rate of
2424%.
a. If the market price of the common stock is
$4545
and dividends are expected to...

If the $1,000 face value, 8% annual coupon bonds with 15 years
remaining to maturity and a current market price of $1,150. $100
par value preferred stock that pays an 11% annual dividend and has
a current market price of $92.Common stock with a current market
price of $50/share. Investors expect the next annual dividend to be
$4.00 and to grow after that at a constant rate of 7% per year into
the foreseeable future.
If new securities today:
New...

Individual
or component costs of
capital)
Compute the cost of the following:
a. A bond that has
$1,000
par value (face value) and a contract or coupon interest rate
of
11
percent. A new issue would have a floatation cost of
6
percent of the
$1115
market value. The bonds mature in
9
years. The firm's average tax rate is 30 percent and its
marginal tax rate is
33
percent.
b. A new common stock issue that paid a
$1.60...

The stock of Gao Computing sells for $50, and last year's
dividend was $3.13. Security analysts are projecting that the
common dividend will grow at a rate of 7% a year. A flotation cost
of 10% would be required to issue new common stock. Gao's preferred
stock sells for $32.61, pays a dividend of $3.30 per share, and new
preferred stock could be sold with a flotation cost of 8%. The firm
has outstanding bonds with 20 years to maturity,...

Rollins Corporation is estimating its WACC. Its target capital
structure is 20 percent debt, 20 percent preferred stock, and 60
percent common equity. Its bonds have a 7.5 percent coupon, paid
semiannually, a current maturity of 20 years, and sell for
$1,105.78. The firm could sell, at par, $100 preferred stock which
pays a 8 percent annual dividend, but flotation costs of 5 percent
would be incurred. Rollins' beta is 1.8, the risk-free rate is 2.45
percent, and the market...

Calculation of individual costs and
WACC Lang Enterprises is interested in
measuring its overall cost of capital. Current investigation has
gathered the following data. The firm is in the 27% tax
bracket.
Debt The firm can raise debt by
selling $1,000-par-value, 5% coupon interest rate, 15-year
bonds on which annual interest payments will be made. To sell
theissue, an average discount of$35 per bond would have to be
given. The firm also must pay flotation costs of $25 per bond.
Preferred stock The...

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