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Cost of capital 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 $1.19 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 35% debt, 25% preferred stock, and 40% common stock. t is taxed at a rate of 27%. a. If the market price of the common stock is $31 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 eamings financing? b. If underpricing and flotation costs on new shares of common stock amount to $6 per share, what is the company's cost of new common stock financing c. The company can issue $2.16 dividend preferred stock for a market price of $31 per share. Flotation costs would amount to $2 per share. What is the cost of preferred stock financing? d. The company can issue S1 000 par va ue 8% cou on 11-year bonds that can be sold or $ 140 each. F otation costs would amount to $30 per bond. Use he estimation mula to ure the approximate after-taxcost of e. What is the WACC? b nancing a lf the market price o the common stock s $31 and d vidends are expected to grow at a rate of 6% per year or he oreseeable future the company's cost of retained earnings financing is 10.0 b. If underpricing and flotation costs on new shares of common stock amount to $6 per share, the company's cost of new common stock financing is 11.04 %. Round to two decimal places. c. the company can issue $2.16 dividend preferred stock or a market price o S31 per share, and tation costs would amount o 2 per share the cost of preferred stock nancing is 74 % % ound to two decimal places. ound to w dec mal places. d. the company can issue S1 0 -par-value, 8% coupon, 11-year bonds that can be sold or $1.140 each, and 4.85%. (Round to two decimal places.) o a on costs would amount to O per bond sing the estima fo mula hea pro mate after ax sto de b inan ang s e. Using the cost of retained earnings. ,,, the firm's WACC, r, is 7.58%. (Round to two decimal places.) Using the cost of new common stock, ro, the firm's WACC., is 7.98 %. (Round to two decimal places.) Cost of capital Edna Recording Studios, Inc., reported earnings available to common stock of $4,000,000 last year. From those earnings, the company paid a dividend of $1.23 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 25% debt, 10% preferred stock, and 65% common stock. It is taxed at a rate of 28%. a. If the market price of the common stock is $36 and dividends are expected to grow at a rate of 7% per year for the reseeable future, what is the company's cost ofretained earnings financing? b. If underpricing and flotation costs on new shares of common stock amount to $6 per share, what is the company's cost of new common stock financing? c. The company can issue $1.72 dividend preferred stock for a market price of $35 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, 10% coupon, 8-year bonds that can be sold for $1.200 each. F ation costs would amount to $35 per bond se eestimation for a tong re the approximate after-tax cos ofd e. What is the WACC? n g? a. If the market price of the common stock is $36 and dividends are expected o grow at a ate o 7% per year for the reseeable future, the company's cost o retained earnings financing s % Round to two decimal places

Answer 1

F G 1 With Retained earnings: Market WACC (Cost value | Weights | %«Weights) | 4,03%| | | b)| 11.05% c)| 7.45% d) 4.84% |e)| 7,58% Cost % al 10.07% 3 Retained eanings 10.07%)$ 40 0.40 -1.19*(1+6%) 31-696 6 Preferred stock 7.45%)$ 25 0.25 1.86%| 2.16(31-2) 7.98% 9 Debt (After tax cost) 4.84%is ri-27%) 35 0.35 1 .70% :((80H 1000-1110)/11)((1110-1000),2 Total S 100 1.00 14 WACC1 7.58% 16 With New equit Market ПАСС (Cost | Weights | %xWeights) 4.42% Cost % value 18 New common stocks 11.05%)$ 401 0.4000 :1 . 19 *(1-6%)(31-6)-6% 21 Preferred stock 7.45%) S 251 0.2500 1.86% 2.16/(31-2) 24 Debt (After tax cost) 351 0.3500 4.84%) ri-27%) $ 1 .70% :((80H 1000-1110)/11)((1110-1000),2 27 Total S 1001.0000 WACC2 7.98%