SECOND PHOTO IS EXAMPLE FOR WHAT WILL BE ASKED FROM A-E......
Cost of capital Edna Recording Studios, Inc., reported earnings available to common stock of $4,400,000 last year. From those earnings, the company paid a dividend of $1.33 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 40% debt, 20% preferred stock, and 40% common stock. It is taxed at a rate of 22%. a. If the market price of the common stock is $32 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 $8 per share, what is the company's cost of new common stock financing? c. The company can issue $1.74 dividend preferred stock for a market price of $33 per share. Flotation costs would amount to $4 per share. What is the cost of preferred stock financing? d. The company can issue $1,000-par-value, 6% coupon, 13-year bonds that can be sold for $1,260 each. Flotation costs would amount to $40 per bond. Use the estimation formula to figure the approximate after-tax cost of debt financing? e. What is the WACC? a. If the market price of the common stock is $32 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 %. (Round to two decimal places.) Cost of capital Edna Recording Studios, Inc., reported earnings available to common stock of $4,800,000 last year. From those earnings, the company paid a dividend of $1.26 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 35% debt, 10% preferred stock, and 55% common stock. It is taxed at a rate of 24% a. If the market price of the common stock is $44 and dividends are expected to grow at a rate of 8% 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 $2.12 dividend preferred stock for a market price of $28 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, 6% coupon, 10-year bonds that can be sold for $1,260 each. Flotation costs would amount to $40 per bond. Use the estimation formula to figure the approximate after-tax cost of debt financing? e. What is the WACC? a. If the market price of the common stock is $44 and dividends are expected to grow at a rate of 8% per year for the foreseeable future, the company's cost of retained earnings financing is 11.09%. (Round to two decimal places.) 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 11.68%. (Round to two decimal places.) c. If the company can issue $2.12 dividend preferred stock for a market price of $28 per share, and flotation costs would amount to $5 per share, the cost of preferred stock financing is 9.22%. (Round to two decimal places.) d. If the company can issue $1,000-par-value, 6% coupon, 10-year bonds that can be sold for $1,260 each, and flotation costs would amount to $40 per bond, using the estimation formula, the approximate after-tax cost of debt financing is 2.60%. (Round to two decimal places.) e. Using the cost of retained earnings, rp, the firm's WACC, Fa; is 7.93%. (Round to two decimal places.) Using the cost of new common stock, in, the firm's WACC, la, is 8.26 %. (Round to two decimal places.)
