Question
Edna Recording Studios, Inc., reported earnings available to common stock of $4,400,000 last year. From those earnings, the company paid a dividend of $1.18 on
Edna Recording Studios, Inc., reported earnings available to common stock of $4,400,000 last year. From those earnings, the company paid a dividend of $1.18 on each of its
1,000,000 common shares outstanding. The capital structure of the company includes 40% debt, 10% preferred stock, and 50% common stock. It is taxed at a rate of
40%.
a. If the market price of the common stock is $39 and dividends are expected to grow at a rate of 9% 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 $1.69 dividend preferred stock for a market price of $30 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,12% coupon, 12-year bonds that can be sold for $1,120 each. Flotation costs would amount to $40 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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