Cost of capitalEdna Recording Studios, Inc., reported earnings available to common stock of

$5,000,000

last year. From those earnings, the company paid a dividend of

$1.34

on each of its

1,000,000

common shares outstanding. The capital structure of the company includes

40%

debt,

20%

preferred stock, and

40%

common stock. It is taxed at a rate of

23%.

a.If the market price of the common stock is

$40

and dividends are expected to grow at a rate of

8%

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

$7

per share, what is the company's cost of new common stock

financing?

c.The company can issue

$1.58

dividend preferred stock for a market price of

$32

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,

11%

coupon,

5-year

bonds that can be sold for

$1,230

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?

a.If the market price of the common stock is

$40

and dividends are expected to grow at a rate of

8%

per year for the foreseeable future, the company's cost of retained earnings financing is

nothing%.

(Round to two decimal places.)b.If

underpricing

and flotation costs on new shares of common stock amount to

$7

per share, the company's cost of new common stock financing is

nothing%.

(Round to two decimal places.)c.If the company can issue

$1.58

dividend preferred stock for a market price of

$32

per share, and flotation costs would amount to

$6

per share, the cost of preferred stock financing is

nothing%.

(Round to two decimal places.)d.If the company can issue

$1,000-par-value,

11%

coupon,

5-year

bonds that can be sold for

$1,230

each, and flotation costs would amount to

$30

per bond, using the estimation formula, the approximate after-tax cost of debt financing is

nothing%.

(Round to two decimal places.)e.Using the cost of retained earnings,

rr,

the firm's WACC,

ra,

is

nothing%.

(Round to two decimal places.)Using the cost of new common stock,

rn,

the firm's WACC,

ra,

is

nothing%.

(Round to two decimal places.)