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 following weights: 40% long-term debt, 10% preferred stock, and 50% common stock equity (retained earning, new common stock, or both). The firm's tax rate is 40%.
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The firm can sell for $980 a 10-year, $1000 par-value bond paying annual interest at a 10% coupon rate. A flotation cost of 3% of the par value is required in addition to the discount of $20 per bond.
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