Question

Hello, please advise. thanks

Here is the condensed 2019 balance sheet for Sunrise Company (in thousands of dollars): 2019 Current assets $2,000 Net fixed assets 3,000 Total assets $5,000 Accounts payable and accruals Short-term debt Long-term debt Preferred stock (10,000 shares) Common stock (50,000 shares) Retained earnings Total common equity Total liabilities and equity $ 900 100 1,100 250 1,300 1,350 $2,650 $5,000 Sunrise's earnings per share last year were $3.20. The common stock sells for $55.00, last year's dividend (Do)was $2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Sunrise's preferred stock pays a dividend of $3.30 per share, and its preferred stock sells for $30.00 per share. The firm's before-tax cost of debt is 10%, and its marginal tax rate is 25%. The firm's currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Sunrise's beta is 1.516. The firm's total debt, which is the sum of the company's short-term debt and long-term debt, equals $1.2 million. Use this data to answer the questions in the assignment.

Questions:

Calculate the cost of the following capital components (answers should be in % with two decimal points):

A. the after-tax cost of debt

B. the after-tax cost of debt

C. the cost of equity from retained earnings

D. the cost of newly issued common stock

Are these answers right below? I got these answers

I got

A 7.5

B. 0.11

C.13.16

D. 0.1362

Please help.  

Answer 1

a)
After tax cost of debt = Before tax cost of debt * (1 - tax rate)
= 10% * (1 - 0.25)
= 7.5%

b)
A and B are same question.

c)
Cost of retained earnings = D1 / P0 + g
= ($2.10 * 1.09) / $55 + 0.09
= 0.0416 + 0.09
= 13.16%

d)

Cost of equity using Dividend growth model:

= D1 / (P0 - F) + G
= ($2.10 * 1.09) / ($55 - ($55 * 10%)) + 0.09
= 0.0462 + 0.09
= 13.62%

Cost of equity using CAPM model:

Cost of equity = Risk free rate + beta * market risk premium
= 6% + 1.516 * 5%
= 6% + 7.58%
= 13.58%

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