Question
Cost of capital Edna RecordingStudios, Inc., reported earnings available to common stock of $4,600,000 last year. From thoseearnings, the company paid a dividend of $1.21
Cost of capitalEdna RecordingStudios, Inc., reported earnings available to common stock of $4,600,000 last year. From thoseearnings, the company paid a dividend of $1.21 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 40% debt, 20% preferredstock, and 40% common stock. It is taxed at a rate of 24%.
a.If the market price of the common stock is $42 and dividends are expected to grow at a rate of 5% per year for the foreseeablefuture, what is thecompany's cost of retained earnings financing?
b.If underpricing and flotation costs on new shares of common stock amount to $6 pershare, what is thecompany's cost of new common stock financing?
c.The company can issue $1.55 dividend preferred stock for a market price of $34 per share. Flotation costs would amount to $4 per share. What is the cost of preferred stock financing?
d.The company can issue $1,000-par-value, 7% coupon, 13-year bonds that can be sold for $1,280 each. Flotation costs would amount to $40 per bond. Use the estimation formula to figure the approximateafter-tax cost of debtfinancing?
e.What is the WACC?
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