Question
Cost of capital Edna Recording Studios, Inc., reported earnings available to common stock of $5,000,000 last year. From those earnings, the company paid a dividend
Cost of capital Edna Recording Studios, Inc., reported earnings available to common stock of $5,000,000 last year. From those earnings, the company paid a dividend of
$1.28 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 25%debt, 10% preferred stock, and 65% common stock. It is taxed at a rate of
40%.
a. If the market price of the common stock is $36 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 $8 per share, what is the company's cost of new common stock financing?
c. The company can issue $1.82 dividend preferred stock for a market price of $29 per share. Flotation costs would amount to $6 per share. What is the cost of preferred stock financing?
d. The company can issue $1,000 -par-value,12%coupon, 7 -year bonds that can be sold for
$1,170 each. Flotation costs would amount to $25 per bond. Use the estimation formula to figure the approximate after-tax cost of debt financing?
e. What is the WACC ?
Round answers to two decimal places
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