Questions

4. Calculate the cost of the following capital components (answers should be in % with two decimal points):

• the cost of newly issued common stock

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

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

7. 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)

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

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

Sunrise's earnings per share last year were $3.20. The common stock sells for $52.00, last year's dividend ( D2 )was $2.25, 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 8.8%. Sunrise's preferred stock pays a dividend of $2.90 per share, and its preferred stock selis for $25.00 per share. The firm's before-tax cost of debt is 12%, 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 5.2%, the riskfree rate is 5.5%, and Sunrise's beta is 1.526 . The firm's total debt, which is the sum of the company's short-term debt and long-term debt, equals $1.2 million. Use this data to answer the questions in the assignment. Calculate the cost of the following capital components (answers should be in \% with two decimal points)