Question
Cost of capitalEdna Recording Studios, Inc., reported earnings available to common stock of $4,400,000 last year. From those earnings, the company paid a dividend of
Cost of capitalEdna Recording Studios, Inc., reported earnings available to common stock of $4,400,000 last year. From those earnings, the company paid a dividend of $1.33 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 45% debt, 15% preferred stock, and 40% common stock. It is taxed at a rate of 22%. a.If the market price of the common stock is $49 and dividends are expected to grow at a rate of 5% 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 $5 per share, what is the company's cost of new common stock financing? c.The company can issue $1.88 dividend preferred stock for a market price of $26 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, 11% coupon, 6-year bonds that can be sold for $1,230 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?
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