Question

Here is the considered 2011 balance sheet for Skye Computer Company ( in thousands of dollars):

Current Assets: 2000; Net Fixed Assets: 3000; Total Assets; 5000.

Current liabilities: 900; long term debt: 1200; Preferred stock(10000 shares): 250; common stock (50000 shares): 1300; retained earnings: 1350; total common equity:2650; total liabilities and equity: 5000

Skye'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 requiredto sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Skye's preferred stock pays a dividend of $3.30per share, and its preferred stock sells for $30.00 per share. The firm can issue long term debt at an interest rate (or before-tax cost) of 10%, and its marginal taxrate is 35%. 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%, andSkye's beta is 1.516. In its cost of capital calculations, the company considers only long-term capital; hence, it disregards current liabilities for calculating itsWACC.

Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings and the costof newly issued common stock. Use the DCF method to find the cost of common equity.

Answer 1

lik my nuts