Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights:
40%
long-term debt,
25%
preferred stock, and
35%
common stock equity (retained earnings, new common stock, or both). The firm's tax rate is
22%.
Debt The firm can sell for
$1020
a
20-year,
$1,000-par-value
bond paying annual interest at a
8.00%
coupon rate. A flotation cost of
3%
of the par value is required.
Preferred stock
9.00%
(annual dividend) preferred stock having a par value of
$100
can be sold for
$88
An additional fee of
$5
per share must be paid to the underwriters.
Common stock The firm's common stock is currently selling for
$80
per share. The stock has paid a dividend that has gradually increased for many years, rising from
$2.00
ten years ago to the
$3.42
dividend payment,
Upper D 0D0,
that the company just recently made. If the company wants to issue new new common stock, it will sell them
$3.00
below the current market price to attract investors, and the company will pay
$3.00
per share in flotation costs.
Calculate the after-tax cost of debt.6.32
The after-tax cost of debt using the approximation formula is
nothing 6.31
Calculate the cost of preferred stock 10.84
Calculate the cost of common stock (both retained earnings and new common stock) 10.02 and 10.39
Calculate the WACC for Dillon Labs.
a) | Price of the bond = 1020-1000*3% = | $ 990 |
Before tax cost of debt = YTM. | ||
YTM using an online calculator = | 8.10% | |
After tax cost of debt = 8.10%*(1-22%) = | 6.32% | |
b) | Cost of preferred stock = 9/(88-5) = | 10.84% |
c) | Growth rate in dividends = (3.42/2.00)^(1/10)-1 = | 5.51% |
Cost of retained earnings = 3.42*1.0551/80 +0.0551= | 10.02% | |
Cost of new equity = 3.42*1.0551/(80-3-3)+0.0551 = | 10.39% | |
d) | WACC: | |
Using retained earnings = 6.32%*40%+10.84%*25%+10.02%*35% = | 8.75% | |
Using new common stock = 6.32%*40%+10.84%*25%+10.39%*35% = | 8.87% |
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted...
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 25% preferred stock, and 35% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 25%. Debt The firm can sell for $1010 a 19-year, $1 comma 000-par-value bond paying annual interest at...
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 50 % long-term debt, 25 % preferred stock, and 25 % common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 23%. Debt: The firm can sell for $1010 a 16 -year, $1,000 -par-value bond paying...
Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 45% long-term debt, 25% preferred stock, and 30% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 29%. Debt The firm can sell for $1025 a 16-year, $1,000-par-value bond...
Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 45% long-term debt, 10% preferred stock, and 45% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 24% Debt The firm can sell for $1020 a 14-year, $1,000-par-value bond...
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 45% long-term debt, 25% preferred stock, and 30% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 28%. Debt The firm can sell for $1030 a 16-year, $1,000-par-value bond paying annual interest at a 11.00%...
Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 50% long-term debt, 10% preferred stock, and 40% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 22%. Debt The firm can sell for $1030 a 17-year, $1,000-par-value bond...
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Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 25% preferred stock, and 35% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 26%.Debt The firm can sell for $1030 a 14-year, $1,000-par-value bond paying...
Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights:35%Long-term debt, 15% preferred stock, and 50% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 22%. .Debt The firm can sell for $1020 a 16-year, $1,0001,000-par-value bond paying annual...