Answered step by step
Verified Expert Solution
Question
1 Approved Answer
ost of capitalEdna Recording Studios, Inc., reported earnings available to common stock of $4,400,000 last year. From those earnings, the company paid a dividend of
ost of capitalEdna Recording Studios, Inc., reported earnings available to common stock of $4,400,000 last year. From those earnings, the company paid a dividend of $1.18 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 30% debt, 15% preferred stock, and 55% common stock. It is taxed at a rate of 21%.
a.If the market price of the common stock is $50 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 $7 per share, what is the company's cost of new common stock financing?
c.The company can issue $1.78 dividend preferred stock for a market price of $27 per share. Flotation costs would amount to $5 per share. What is the cost of preferred stock financing?
d.The company can issue $1,000-par-value, 8% annual coupon, 8-year bonds that can be sold for $1,140 each. Flotation costs would amount to $35 per bond. What is the after-tax cost of debt financing?
e.What is the WACC?
Question content area bottom
Part 1
a.If the market price of the common stock is $50 and dividends are expected to grow at a rate of 6% per year for the foreseeable future, the company's cost of retained earnings financing is enter your response here%. (Round to two decimal places.)
Part 2
b.If underpricing and flotation costs on new shares of common stock amount to $7 per share, the company's cost of new common stock financing is enter your response here%. (Round to two decimal places.)
Part 3
c.If the company can issue $1.78 dividend preferred stock for a market price of $27 per share, and flotation costs would amount to $5 per share, the cost of preferred stock financing is enter your response here%. (Round to two decimal places.)
Part 4
d.If the company can issue $1,000-par-value, 8% coupon, 8-year bonds that can be sold for $1,140 each, and flotation costs would amount to $35 per bond, the after-tax cost of debt financing is enter your response here%. (Round to two decimal places.)
Part 5
e.Using the cost of retained earnings, rr, the firm's WACC, ra, is enter your response here%. (Round to two decimal places.)
Part 6
Using the cost of new common stock, rn, the firm's WACC, ra, is enter your response here%. (Round to two decimal places.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started