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 $1.18 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 35% debt, 20% preferred stock, and 45% common stock. It is taxed at a rate of 21%. a. If the market price of the common stock is $35 and dividends are expected to grow at a rate of 7% 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 $6 per share, what is the company's cost of new common stock financing? c. The company can issue $1.86 dividend preferred stock for a market price of $32 per share. Flotation costs would amount to $3 per share. What is the cost of preferred stock financing? d. The company can issue $1,000-par-value, 8% coupon, 15-year bonds that can be sold for $1,120 each. Flotation costs would amount to $40 per bond. Use the estimation formula to figure the approximate after-tax cost of debt financing? e. What is the WACC? a. If the market price of the common stock is $35 and dividends are expected to grow at a rate of 7% per year for the foreseeable future, the company's cost of retained earnings financing is %. (Round to two decimal places.) 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 %. (Round to two decimal places.) c. If the company can issue $1.86 dividend preferred stock for a market price of $32 per share, and flotation costs would amount to $3 per share, the cost of preferred stock financing is %. (Round to two decimal places.) d. If the company can issue $1,000-par-value, 8% coupon, 15-year bonds that can be sold for $1,120 each, and flotation costs would amount to $40 per bond, using the estimation formula, the approximate after-tax cost of debt financing is %. (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 $1.18 on each of its 1,000,000 %. a. If the market price of the common stock is $35 and dividends are expected to grow at a rate of 7% per year for the foreseeable future, the company's cost of retained earnings financing is %. (Round to two decimal places.) 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 %. (Round to two decimal places.) C. If the company can issue $1.86 dividend preferred stock for a market price of $32 per share, and flotation costs would amount to $3 per share, the cost of preferred stock financing is 1%. (Round to two decimal places.) d. If the company can issue $1,000-par-value, 8% coupon, 15-year bonds that can be sold for $1,120 each, and flotation costs would amount to $40 per bond, using the estimation formula, the approximate after-tax cost of debt financing is %. (Round to two decimal places.) . e. Using the cost of retained earnings, rr, the firm's WACC, ra, is %. (Round to two decimal places.) Using the cost of new common stock, r'n, the firm's WACC, ra, is %. (Round to two decimal places.)
