Question

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

​$1.26 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 30​% ​debt, 25​% preferred​ stock, and 45​% common stock. It is taxed at a rate of

21​%.

a.  If the market price of the common stock is ​$43 and dividends are expected to grow at a rate of 6​% per year for the foreseeable​ future, what is the​ company's cost of retained earnings financing​?

b.  If underpricing and flotation costs on new shares of common stock amount to ​$8 per​ share, what is the​ company's cost of new common stock financing​?

c.  The company can issue ​$1.66 dividend preferred stock for a market price of ​$27 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, 13​-year bonds that can be sold for ​$1,250 each. Flotation costs would amount to ​$20 per bond. Use the estimation formula to figure the approximate​ after-tax cost of debt​ financing?

e.  What is the WACC​?

Using the cost of retained​ earnings, r Subscript r​, the​ firm's WACC, r Subscript a​, is _______​%.

​(Round to two decimal​ places.)

Using the cost of new common​ stock,r Subscript n​, the​ firm's WACC, r Subscript a​, is ______​%.

​(Round to two decimal​ places.)

Answer 1

Calulate the Cost o etained eamtna oloutng fomula: the bupin ke ahove equakun fo calculate the COSt ea vetained eamings DoCI+9) Pa Here cost dretained eaanings diutdend cuvend Frauth Yate Pce peu shaue te 8126 (1.O6) 9 43 9.11 companys Stoce firan cng The Cost cal culate as foliaus Common new Sales- Flotatfon cost + Net moceeds : pvemium du count $35

fnancng COst o rw Common Stock proceeds Net +61 3S O 03816 t o o6 .82. $1. 66 Diufdend Paid on Plotaton cost ts 85 Per macet Rce is $ 2 Shaue Proceeds Sal eA- Edkaton Cost Net Cost d efeuence stDC tc Calaulate the follous as Coss q prefersed ock Cnaneing dend Amual moceeds (maubet value)

ued a bond 8 1250 at . Sate ialue is The Pio tateon COSE penkum Nle roce ed : salet . flotatrm COst* Dscount (250- 20 2 30 2 Calulate COS debt as folows the Pauvalue-Netraceels + Cost ddebt(Ya) Annualnteest in dollaus NetrOceedA-+Pauvalue 2 g1230SIO0o 2 8 28 Co o ebE is det d(- +0a rate ) MCL an cost 828 (1- 211.) 6.S4.1.

follows calculate -he WACC as WA CC Atte tancost of debt t o pe feued sock o COst ofr pefewed Stockc+ Comman etoCK K COSH Common StoCle .949.