Question

Cost of capital Edra Recording Studios, Inc., reported earnings available to common stock of S4 400.000 last year. From those earnings, the company paid a dividend of $1.32 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 30% debt, 10% proferred stock, and 60% common stock. It is taxed at a rate of 28% a. "the market price of the common stock is $32 and dividends are expected to grow at a rate of 9% per year for the foreseeable future, what is the company's cost of retained earnings Anancing? b. I underpricing and flotation costs on new shares of common stock amount to $5 per share, what is the company's cost of new common stock financing? c. The company can issue $1.76 dividend preferred stock for a market price of $20 per share. Flotation costs would amount to $5 per share. What is the cost of preferred stock financing? d. The company can issue $1,000-par-value, 11% coupon, 14-year bonds that can be sold for $1,210 each. Flotation costs would amount to $30 per bond. Use the estimation formula to figure the approximate after-tax cost of debt financing? e. What is the WACC? a. I the market price of the common stock is $32 and dividends are expected to grow at a rate of 0% per year for the foreseeable future, the company's cost of retained earnings financing is. (Round to two decimal places)

Answer 1

1-	cost of retained earning	(expected dividend/market price)+growth rate	(1.4388/32)+9%	13.50%
	expected dividend	1.32*1.09	1.4388
2-	cost of new common stock	(expected dividend/market price-flotation cost)+growth rate	(1.4388/(32-5))+9%	14.33%
3-	cost of preferred stock	(preferred dividend/net proceeds)	1.76/(29-5)	7.33%
4-	before tax cost of debt= using rate function in MS excel	rate(nper,pmt,pv,fv,type) nper=14 pmt = 1000*11% =110 pv = 1210-30 = 1190 fv = 1000 type =0		8.61%
	after tax cost of debt	8.61*(-.28)		6.20
5-
WACC	Weight	component cost of capital	weight*component cost of capital
debt	0.3	6.20%	0.0186
preferred stock	0.1	7.33%	0.00733
common stock	0.6	13.50%	0.081
WACC = sum of weight*component cost of capital			10.69%