P9–16 Cost of capital Edna Recording Studios, Inc., reported earnings available to common stock of $4,200,000 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 40% debt, 10% preferred stock, and 50% common stock. It is taxed at a rate of 40%.

a. If the market price of the common stock is $40 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

$7.00 per share, what is the company’s cost of new common stock financing?

c. The company can issue $2.00 dividend preferred stock for a market price of

$25.00 per share. Flotation costs would amount to $3.00 per share. What is the cost of preferred stock financing?

d. The company can issue $1,000-par-value, 10% coupon, 5-year bonds that can be sold for $1,200 each. Flotation costs would amount to $25.00 per bond. Use the estimation formula to figure the approximate cost of debt financing.

e. What is the WACC?