Condensed 2019 Balance Sheet

	2019
Current assets	$2,000
Net Fixed assets	3,000
Total assets	$5,000
Accounts payable and accurals	$900
Short term debt	100
Long term debt	1,100
Preferred Stock (10,000 shares)	250
Common Stock (50,000 shares)	1,300
Retained earnings	1,350
Total common equity	$2,650
Total liabilities and equity	$5,000

Sunrises earnings per share last year were $3.20. The common stock sells for $55.00, last years dividend (D₀)was $2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Sunrises preferred stock pays a dividend of $3.30 per share, and its preferred stock sells for $30.00 per share. The firms before-tax cost of debt is 10%, and its marginal tax rate is 25%. 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 Sunrises beta is 1.516. The firms total debt, which is the sum of the companys short-term debt and long-term debt, equals $1.2 million.

1.

Calculate the cost of the following capital components (answers should be in % with two decimal points):

• the after-tax cost of debt

2.

Calculate the cost of the following capital components (answers should be in % with two decimal points):

• the cost of preferred stock

3. Calculate the cost of the following capital components (answers should be in % with two decimal points):

• the cost of equity from retained earnings using the DCF method

4. Calculate the cost of the following capital components (answers should be in % with two decimal points):

• the cost of newly issued common stock using the DCF method

5. Now calculate the cost of common equity from retained earnings, using the CAPM method.

6. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r_e and r_s as determined by the DCF method, and add that differential to the CAPM value for r_s.)

7. If Sunrise continues to use the same market-value capital structure, what is the firms WACC assuming that

(a) it uses only retained earnings for equity (for cost of equity use the average of your calculated costs via DCF and CAPM)

8. If Sunrise continues to use the same market-value capital structure, what is the firms WACC assuming that

(b) if it expands so rapidly that it must issue new common stock?