Here is the condensed 2019 balance sheet for Sunrise Company (in thousands of dollars):

Sunrises earnings per share last year were $3.20. The common stock sells for $55.00, last years dividend (D₀)was $2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Sunrises preferred stock pays a dividend of $3.30 per share, and its preferred stock sells for $30.00 per share. The firms before-tax cost of debt is 10%, and its marginal tax rate is 25%. The firms currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Sunrises beta is 1.516. The firms total debt, which is the sum of the companys short-term debt and long-term debt, equals $1.2 million.

1.Now calculate the cost of common equity from retained earnings, using the CAPM method.

2.What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r_e and r_s as determined by the DCF method, and add that differential to the CAPM value for r_s.)

3.If Sunrise continues to use the same market-value capital structure, what is the firms WACC assuming that

(a) it uses only retained earnings for equity (for cost of equity use the average of your calculated costs via DCF and CAPM)

(b) if it expands so rapidly that it must issue new common stock?