Question

 Dillon Labs has asked its financial manager to measure the cost of each specific type of...

 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:

50% ​long-term debt, 15% preferred​ stock, and 35% common stock equity​ (retained earnings, new common​ stock, or​ both). The​ firm's tax rate is 29%.

Debt The firm can sell for ​$1015 a 13​-year, $1,000​-par-value bond paying annual interest at a 7.00%   coupon rate. A flotation cost of 4​% of the par value is required.

Preferred stock 10.00​% ​(annual dividend) preferred stock having a par value of ​$100 can be sold for $92. An additional fee of ​$4 per share must be paid to the underwriters.

Common stock The​ firm's common stock is currently selling for ​$50 per share. The stock has paid a dividend that has gradually increased for many​ years, rising from ​$3.00 ten years ago to the ​$4.89 dividend​ payment, Upper D 0​, that the company just recently made. If the company wants to issue new new common​ stock, it will sell them $2.00 below the current market price to attract​ investors, and the company will pay $3.00 per share in flotation costs.

a.  Calculate the​ after-tax cost of debt.

b.  Calculate the cost of preferred stock.

c.  Calculate the cost of common stock​ (both retained earnings and new common​ stock).

d.  Calculate the WACC for Dillon Labs.

Homework Answers

Answer #1

a). To find the kD, we need to put the following values in the financial calculator:

INPUT 13 -(1015 * 0.96) = -974.4 7%*1,000=70 1,000
TVM N I/Y PV PMT FV
OUTPUT 7.31

So, After-tax kD = kD x (1 - t) = 7.31% x (1 - 0.29) = 5.19%

b). kP = Annual Dividend / [P0 - fC] = $10 / [$92 - $4] = 11.36%

c). g = [FV/PV]1/n - 1 = [4.89/3]1/10 - 1 = 1.0501 - 1 = 0.0501, or 5.01%

kE(Retained Earnings) = [{D0 x (1 + g)} / P0] + g

= [($4.89 x 1.0501) / $50] + 0.0501 = 0.1027 + 0.0501 = 0.1528, or 15.28%

kE(New Common Stock) = [{D0 x (1 + g)} / {P0 - fC)] + g

= [($4.89 x 1.0501) / ($50 - $3)] + 0.0501 = 0.1093 + 0.0501 = 0.1593, or 15.93%

Average kE = [15.28% + 15.93%] / 2 = 31.21% / 2 = 15.60%

d). WACC = [wD x After-tax kD] + [wP x kP] + [wE x kE]

= [0.50 x 5.19%] + [0.15 x 11.36%] + [0.35 x 15.60%] = 2.60% + 1.70% + 5.46% = 9.76%

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Dillon Labs has asked its financial manager to measure the cost of each specific type of...
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: 40​% ​long-term debt, 25​% preferred​ stock, and 35​% common stock equity​ (retained earnings, new common​ stock, or​ both). The​ firm's tax rate is 22​%. Debt The firm can sell for ​$1020 a 20​-year, ​$1,000​-par-value bond paying annual interest at a 8.00​%...
Dillon Labs has asked its financial manager to measure the cost of each specific type of...
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, 20​% preferred​ stock, and 35​% common stock equity​ (retained earnings, new common​ stock, or​ both). The​ firm's tax rate is 20​%. Debt The firm can sell for $965 a 13​-year, $1,000​-par-value bond paying annual interest at a 7.00​%...
Calculation of individual costs and WACC   Dillon Labs has asked its financial manager to measure the...
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: 40 ​% ​long-term debt, 25 ​% preferred​ stock, and 35 ​% common stock equity​ (retained earnings, new common​ stock, or​ both). The​ firm's tax rate is 29 ​%. Debt The firm can sell for ​$1030...
Dillon Labs has asked its financial manager to measure the cost of each specific type of...
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: 50 % long-term debt, 20 % preferred stock, and 30 % common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 20 %. Debt The firm can sell for $975 a 14 -year, $1 comma 000...
Calculation of individual costs and WACC   Dillon Labs has asked its financial manager to measure the...
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: 50​% ​long-term debt, 15​% preferred​ stock, and 35​% common stock equity​ (retained earnings, new common​ stock, or​ both). The​ firm's tax rate is 29​%. Debt The firm can sell for ​$1000 a 18​-year, ​$1 comma...
Calculation of individual costs and WACC   Dillon Labs has asked its financial manager to measure the...
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: 30​% ​long-term debt,15​% preferred​ stock, and 55​% common stock equity​ (retained earnings, new common​ stock, or​ both). The​ firm's tax rate is 26​%. Debt The firm can sell for ​$1020 a 13​-year, ​$1,000​-par-value bond paying...
Calculation of individual costs and WACC   Dillon Labs has asked its financial manager to measure the...
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: 30​% ​long-term debt, 10​% preferred​ stock, and 60​% common stock equity​ (retained earnings, new common​ stock, or​ both). The​ firm's tax rate is 22​%. Debt The firm can sell for ​$1025 a 13​-year, ​$1, 000​-par-value...
Calculation of individual costs and WACC   Dillon Labs has asked its financial manager to measure the...
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: 30​% ​long-term debt, 10​% preferred​ stock, and 60​% common stock equity​ (retained earnings, new common​ stock, or​ both). The​ firm's tax rate is 22​%. Debt The firm can sell for ​$1025 a 13​-year, ​$1, 000​-par-value...
METRO MACHINE HAS ASKED ITS FINANCIAL MANAGER TO MEASURE THE COST OF EACH SPECIFIC TYPE OF...
METRO MACHINE 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% DEBT     10% PREFERRED STOCK        AND 45% COMMON EQUITY. ASSUME 21% TAX RATE. DEBT: THE FIRM CAN BORROW AT 8.25% PRETAX ON AN ALL-IN BASIS PREFERRED STOCK: 5% (ANNUAL DIVIDEND) PREFERRED STOCK HAVING A PAR VALUE OF $100 CAN BE SOLD...
A firm has determined its optimal capital structure, which is composed of the following sources and...
A firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions: Source of capital Target Market Proportions Long-term Debt 30% Preferred stock 5% Common stock equity 65% Debt: The firm can sell a 20-year, $1,000 par value, 9 percent bond for $980. A flotation cost of 2 percent of the face value would be required in addition to the discount of $20. Preferred Stock: The firm has determined it can issue...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT