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

Skye's earnings per share last year were $3.40. The common stock sells for $60.00, last year's dividend (D₀) was $2.30, and a flotation cost of 11% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 10%. Skye's preferred stock pays a dividend of $3.50 per share, and its preferred stock sells for $35.00 per share. The firm's before-tax cost of debt is 10%, and its marginal tax rate is 25%. The firm's currently outstanding 10% 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 1.366. The firm's total debt, which is the sum of the company's short-term debt and long-term debt, equals $1.525 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.

Excel Sheet

35 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 b. Calculating the cost of common equity from retained earnings, using the CAPM method Cost of retained earnings c. Calculating the cost of new common stock based on the CAPM Flotation cost adjustment Cost of new common stock 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 \begin{tabular}{|c|c|} \hline & 2021 \\ \hline Current assets & $2,000 \\ \hline Net fixed assets & 3,000 \\ \hline Total assets & $5,000 \\ \hline Accounts payable and accruals & $700 \\ \hline Short-term debt & 200 \\ \hline Long-term debt & 1,325 \\ \hline Preferred stock (15,000 shares ) & 475 \\ \hline Common stock (40,000 shares) & 1,125 \\ \hline Retained earnings & 1,175 \\ \hline Total common equity & $2,300 \\ \hline Total liabilities and equity & $5,000 \\ \hline \end{tabular} \begin{tabular}{|c|c|c|} \hline & A & B \\ \hline 1 & Calculating the WACC & \\ \hline \multicolumn{3}{|l|}{2} \\ \hline 3 & \multicolumn{2}{|c|}{ Skye Computer Company: Balance Sheet as of December 31} \\ \hline 4 & (in thousands of dollars) & \\ \hline 5 & & 2021 \\ \hline 6 & Current assets & $2,000 \\ \hline 7 & Net fixed assets & 3,000 \\ \hline 8 & Total assets & $5,000 \\ \hline \multicolumn{3}{|l|}{9} \\ \hline 10 & Accounts payable and accruals & $700 \\ \hline 11 & Short-term debt & 200 \\ \hline 12 & Long-term debt & 1,325 \\ \hline 13 & Preferred stock & 475 \\ \hline 14 & Common stock & 1,125 \\ \hline 15 & Retained earnings & 1,175 \\ \hline 16 & Total common equity & $2,300 \\ \hline 17 & Total liabilities and equity & $5,000 \\ \hline \multicolumn{3}{|l|}{18} \\ \hline 19 & Last year's earnings per share & $3.40 \\ \hline 20 & Current price of common stock, P0 & $60.00 \\ \hline 21 & Last year's dividend on common stock, D0 & $2.30 \\ \hline 22 & Growth rate of common dividend, g & 10% \\ \hline 23 & Flotation cost for common stock, F & 11% \\ \hline 24 & Common stock outstanding & 40,000 \\ \hline 25 & Current price of preferred stock, Pp & $35.00 \\ \hline 26 & Dividend on preferre & $3.50 \\ \hline \end{tabular} a. 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: % % % % b. Now calculate the cost of common equity from retained earnings, using the CAPM method. % c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between re and rs as determined by the DCF method, and add that differential to the CAPM value for rs ) % d. 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.) WACC 1 : % WACC 2 : %