Calculating the WACC

Here is the condensed 2016 balance sheet for Skye Computer Company (in thousands of dollar)

Skyes earnings per share last year were $3.20. The common stock sells for $55, last years dividend (d0) was $2.10, and a flotation cost of 10% would be require to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Skyes preferred stock pays a dividend of $3.30 per share, and its preferred stock sells for $30 per share. The firms before-tax cost of debt is 10%, and its marginal tax rate is 35%. The firms 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%, and Skyes beta is 1.516. The firms total debt, which is the sum of the companys short term debt, equals $1.2 million.

Current assets	$ 2,000
Net fixed assets	$ 3,000
total assets	$ 5,000
current liabilities	$ 900
long-term debt	$ 1,200
preferred stock	$ 250
common stock	$ 1,300
retained earnings	$ 1,350
total common equity	$ 2,650
total liabilities and equity	$ 5,000

d. If Skye continues to use the same market-value capital structure, what is the firms WACC assuming that (1) it uses only retained earnings for equity? (2) If it expands so rapidly that it must issue new common stock?

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