Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Cost of capital Edna Recording Studios, Inc., reported earnings available to common stock of $4,600,000 last year. From those earnings, the company paid a dividend
Cost of capital Edna Recording Studios, Inc., reported earnings available to common stock of $4,600,000 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 35% debt, 15% preferred stock, and 50% common stock. It is taxed at a rate of 25%. a. If the market price of the common stock is $33 and dividends are expected to grow at a rate of 9% 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 $2.24 dividend preferred stock for a market price of $34 per share. Flotation costs would amount to $2 per share. What is the cost of preferred stock financing? d. The company can issue $1,000-par-value, 10% coupon, 6-year bonds that can be sold for $1,160 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
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started