Cost of capital Edna Recording Studios, Inc., reported earnings available to common stock of $4,400,000 last year. From those earnings, the company paid a dividend of $1.17 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 45% debt, 25% preferred stock, and 30% common stock. It is taxed at a rate of 25%. a. If the market price of the common stock is $48 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 $9 per share, what is the company's cost of new common stock financing? c. The company can issue $2.21 dividend preferred stock for a market price of $34 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, 9% coupon, 8-year bonds that can be sold for $1,210 each. Flotation costs would amount to $30 per bond. Use the estimation formula to figure the approximate after-tax cost of debt financing? e. What is the WACC? Rr. a. If the market price of the common stock is $48 and dividends are expected to grow at a rate of 9% per year for the foreseeable future, the company's cost of retained earnings financing is %. (Round to two decimal places.) a. If the market price of the common stock is $43 and dividends are expected to grow at a rate of 9% per year for the foreseeable future, the company's cost of retained earnings financing is 12.12 %. (Round to two decimal places.) b. If underpricing and flotation costs on new shares of common stock amount to $8 per share, the company's cost of new common stock financing is 12.83 %. (Round to two decimal places.) c. If the company can issue $2.38 dividend preferred stock for a market price of $35 per share, and flotation costs would amount to $5 per share, the cost of preferred stock financing is 7.93 %. (Round to two decimal places.) d. If the company can issue $1,000-par-value, 12% coupon, 5-year bonds that can be sold for $1,270 each, and flotation costs would amount to $30 per bond, using the estimation formula, the approximate after-tax cost of debt financing is 4.57%. (Round to two decimal places.) e. Using the cost of retained earnings, rr, the firm's WACC, la, is 8.25 %. (Round to two decimal places.) Using the cost of new common stock, Pn, the firm's WACC, ra, is 8.57 %. (Round to two decimal places.)
