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:
30?% long-term debt,
10?% preferred? stock, and
60?% common stock equity? (retained earnings, new common? stock, or? both). The? firm's tax rate is 20?%.
Debt The firm can sell for $980 a 16?-year, ?$1,000?-par-value bond paying annual interest at a 9.00?% coupon rate. A flotation cost of 3?% of the par value is required in addition to the discount of ?$20 per bond.
Preferred stock??
9.00?%?(annual dividend) preferred stock having a par value of ?$100can be sold for?$65 An additional fee of ?$44 per share must be paid to the underwriters.
Common stock??The? firm's common stock is currently selling for ?$80 per share. The dividend expected to be paid at the end of the coming year?(2016) is ?$3.19. Its dividend? payments, which have been approximately 60?%of earnings per share in the past 5? years, were as shown in the table
Year
Dividend
2015 $3.043
2014 ?$2.89
2013 ?$2.76
2012 ?$2.632.63
2011 $2.50
It is expected that to attract? buyers, new common stock must be underpriced
?$88 per? share, and the firm must also pay ?$3.50 per share in flotation costs. Dividend payments are expected to continue at
60?% of earnings. ?
a.??Calculate the? after-tax cost of debt.
b.??Calculate the cost of preferred stock.
c.??Calculate the cost of common stock.
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