Question

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 annual interest at a 8.00% coupon rate. A flotation cost of 2% 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 $2 per share must be paid to the underwriters.

Common stock The firm's common stock is currently selling for
$59.43 per share. The stock has paid a dividend that has gradually
increased for many years, rising from $2.00 ten years ago to the
$3.58 dividend payment,*D*0, that the company just
recently made. If the company wants to issue new new common stock,
it will sell them $3.00 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.

a. The after-tax cost of debt using the bond's yield to maturity (YTM) is 5.925.92%. (Round to two decimal places.)

The after-tax cost of debt using the approximation formula is _____ (Round to two decimal places.)

Answer #1

a. use RATE function in EXCEL to find the cost of debt

=RATE(nper,pmt,pv,fv,type)

nper=13 years

pmt=annual coupon=coupon rate*face value=8%*1000=80

pv=current price=1020-flotation cost=1020-(2%*1000)=1020-20=1000

fv=face value=1000

=RATE(13,80,-1000,1000,0)=8%

after tax cost of debt=cost of debt*(1-tax rate)=8%*(1-26%)=5.92%

b. cost of preferred stock=annual dividend/(price of preferred stock-flotation cost)=(10%*100)/(92-2)=10/90=11.11%

c. growth rate=[(3.58/2)^(1/10)]-1=1.05995-1=5.995%

D1=D0*(1+g)=3.58*(1+5.995%)=$3.795

Cost of common stock=(D1/(Share price-flotation cost-discount))+growth rate=(3.795/(59.43-3-3))+5.995%=13.10%

d. WACC=(weight of equity*cost of equity)+(weight of debt*after tax cost of debt)+ (weight of preferred stock*cost of preferred stock)=(55%*13.1%)+(30%*5.92%)+(15%*11.11%)=8.85%

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
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its financial manager to measure the cost of each specific type of
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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...

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%.
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$1,000-par-value bond paying annual interest at a
7.00% ...

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%.
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$1020
a
20-year,
$1,000-par-value
bond paying annual interest at a
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