Here is the condensed 2021 balance sheet for Skye Computer Company (in thousands of dollars):

	2021
Current assets		$	1,600
Net fixed assets			2,400
Total assets		$	4,000
Accounts payable and accruals		$	600
Short-term debt			100
Long-term debt			1,100
Preferred stock (10,000 shares)			200
Common stock (40,000 shares)			975
Retained earnings			1,025
Total common equity		$	2,000
Total liabilities and equity		$	4,000

Skye's earnings per share last year were $2.90. The common stock sells for $55.00, last year's dividend (D₀) was $2.00, and a flotation cost of 8% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Skye's preferred stock pays a dividend of $3.00 per share, and its preferred stock sells for $25.00 per share. The firm's before-tax cost of debt is 8%, and its marginal tax rate is 25%. The firm's currently outstanding 8% annual coupon rate, long-term debt sells at par value. The market risk premium is 4%, the risk-free rate is 5%, and Skye's beta is 1.514. The firm's total debt, which is the sum of the company's short-term debt and long-term debt, equals $1.2 million.

The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. Round your answers to two decimal places.

1. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity.

   After-tax cost of debt:

   Cost of preferred stock:

   Cost of retained earnings:

   Cost of new common stock:

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

3. 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.)

4. If Skye continues to use the same market-value capital structure, what is the firm's WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock? (Hint: Use the market value capital structure excluding current liabilities to determine the weights. Also, use the simple average of the required values obtained under the two methods in calculating WACC.)

   WACC₁:

   WACC₂:

Skye Computer Company: Balance Sheet as of December 31 (in thousands of dollars) 2021 Current assets $1,600 Net fixed assets 2,400 Total assets $4,000 Accounts payable and accruals Short-term debt Long-term debt Preferred stock Common stock Retained earnings Total common equity Total liabilities and equity $600 100 1,100 200 975 1,025 $2,000 $4,000 Last year's earnings per share Current price of common stock, Po Last year's dividend on common stock, D. Growth rate of common dividend, g Flotation cost for common stock, F Common stock outstanding Current price of preferred stock, P Dividend on preferred stock, D Preferred stock outstanding Before-tax cost of debt, ra Market risk premium, rm - PRF Risk-free rate, RF Beta Tax rate Total debt $2.90 $55.00 $2.00 9% 8% 40,000 $25.00 $3.00 10,000 8% 4% 5% 1.514 25% $1,200 thousand Formulas a. Calculating the cost of each capital component (using the DCF method to find the cost of common equity) After-tax cost of debt Cost of preferred stock Cost of retained earnings Cost of new common stock #N/A #N/A #N/A #N/A b. Calculating the cost of common equity from retained earnings, using the CAPM method Cost of retained earnings #N/A c. Calculating the cost of new common stock based on the CAPM Flotation cost adjustment Cost of new common stock #N/A #N/A d. Calculating the firm's WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock Market value (in thousands) Weight Total debt Preferred stock Common equity Total Weight #N/A Market value (in thousands) #N/A #N/A #N/A #N/A #N/A #N/A #N/A WACC WACC2 #N/A #N/A Skye Computer Company: Balance Sheet as of December 31 (in thousands of dollars) 2021 Current assets $1,600 Net fixed assets 2,400 Total assets $4,000 Accounts payable and accruals Short-term debt Long-term debt Preferred stock Common stock Retained earnings Total common equity Total liabilities and equity $600 100 1,100 200 975 1,025 $2,000 $4,000 Last year's earnings per share Current price of common stock, Po Last year's dividend on common stock, D. Growth rate of common dividend, g Flotation cost for common stock, F Common stock outstanding Current price of preferred stock, P Dividend on preferred stock, D Preferred stock outstanding Before-tax cost of debt, ra Market risk premium, rm - PRF Risk-free rate, RF Beta Tax rate Total debt $2.90 $55.00 $2.00 9% 8% 40,000 $25.00 $3.00 10,000 8% 4% 5% 1.514 25% $1,200 thousand Formulas a. Calculating the cost of each capital component (using the DCF method to find the cost of common equity) After-tax cost of debt Cost of preferred stock Cost of retained earnings Cost of new common stock #N/A #N/A #N/A #N/A b. Calculating the cost of common equity from retained earnings, using the CAPM method Cost of retained earnings #N/A c. Calculating the cost of new common stock based on the CAPM Flotation cost adjustment Cost of new common stock #N/A #N/A d. Calculating the firm's WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock Market value (in thousands) Weight Total debt Preferred stock Common equity Total Weight #N/A Market value (in thousands) #N/A #N/A #N/A #N/A #N/A #N/A #N/A WACC WACC2 #N/A #N/A