Question
Edna Recording Studios, Inc., reported earnings available to common stock of $5,000,000 last year. From those earnings, the company paid a dividend of $1.29 on
Edna Recording Studios, Inc., reported earnings available to common stock of $5,000,000 last year. From those earnings, the company paid a dividend of $1.29 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 30% debt, 25% preferred stock, and 45% common stock. It is taxed at a rate of 26%.
a.If the market price of the common stock is $30 and dividends are expected to grow at a rate of 6% 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 $6 per share, what is the company's cost of new common stock financing?
c.The company can issue $1.81 dividend preferred stock for a market price of $29 per share. Flotation costs would amount to $2 per share. What is the cost of preferred stock financing?
d.The company can issue $1,000-par-value, 10% coupon, 14-year bonds that can be sold for $1190 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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