Question
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the followingweights: 45% long-term debt, 10% preferredstock, and 45% common stock equity(retained earnings, new commonstock, orboth). Thefirm's tax rate is 25%.
Debt The firm can sell for $1010 a 12-year, $1,000-par-value bond paying annual interest at a 9.00% coupon rate. A flotation cost of 2 % of the par value is required.
Preferred stock7.00% (annual dividend) preferred stock having a par value of $100 can be sold for $88. An additional fee of $2 per share must be paid to the underwriters.
Common stockThefirm's common stock is currently selling for $80 per share. The stock has paid a dividend that has gradually increased for manyyears, rising from $2.50 ten years ago to the $3.70 dividendpayment, D0, that the company just recently made. If the company wants to issue new new commonstock, it will sell them $1.50 below the current market price to attractinvestors, and the company will pay $3.00 per share in flotation costs.
a.Calculate theafter-tax cost of debt.
b.Calculate the cost of preferred stock.
c.Calculate the cost of common stock(both retained earnings and new commonstock).
d.Calculate the WACC for Dillon Labs.
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