Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

hi! Im sort of going through this already solved problem trying to figure out how its done and I can't figure out where they got

hi! Im sort of going through this already solved problem trying to figure out how its done and I can't figure out where they got the $78 from. any assistance is appreciated. thanks! image text in transcribed
image text in transcribed
The Cost of Capital 1. Calculation of individual costs and WACC Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data. The firm is in the 40% tax bracket. Debt The firm can raise debt by selling $1,000 - par-value, 8% coupon interest rate, 20 - year bonds on which annual interest payments will be made. To sell the issue, an average discount of $30 per bond would have to be given. The firm also must pay flotation costs of $30 per bond. Preferred stock The firm can sell 8% preferred stock at its $95 - per-share par value. The cost of issuing and selling the preferred stock is expected to be $5 per share. Preferred stock can be sold under these terms. Common stock The firm's common stock is currently selling for $90 per share. The firm expects to pay cash dividends of $7 per share next year. The firm's dividends have been growing at an annual rate of 6%, and this growth is expected to continue into the future. The stock must be underpriced by $7 per share, and flotation costs are expected to amount to $5 per share. The firm can sell new common stock under these terms. Retained earnings When measuring this cost, the firm does not concern itself with the tax bracket or brokerage fees owners. It expects to have available $100,000 of retained earnings in the coming year; once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing. a. Calculate the after- tax cost of debt. b. Calculate the cost of preferred stock. c. Calculate the cost of common stock. d. Calculate the firm's weighted average cost of capital using the capital structure weights shown in the following table. Prices are always net of flotation and other transactions cost. (c) Common Stock: kn=NnDI+gkp=$78$7.00=0.06=0.1497=14.97%

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

American Public School Finance

Authors: William Owings, Leslie Kaplan

2nd Edition

1111838046, 978-1111838041

More Books

Students also viewed these Finance questions

Question

What conflicts of interest had to be resolved?

Answered: 1 week ago