Solutions needed for for P9-16 a through e.

3 Source of capital arget ma value weight Long-term debt 30% Preferred stock 15 Common stock equity Total 55 100% LG 4 LG 6 LG4 X LG 6 MyLab The cost of debt is 4.2%, the cost of preferred stock is 9.5%, the cost of retained earn- ings is 13.0%, and the cost of new common stock is 15.0%. All are after-tax rates. The company's debt represents 25%, the preferred stock represents 10%, and the common stock equity represents 65% of total capital on the basis of the current mar- ket values of the three components. The company expects to have a significant amount of retained earnings available and does not expect to sell any new common stock. a. Calculate the WACC on the basis of historical market value weights. b. Calculate the WACC on the basis of target market value weights. c. Compare the answers obtained in parts a and b. Explain the differences. Cost of capital Edna Recording Studios Inc. reported earnings available to common stock of $4,200,000 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 40% debt, 10% preferred stock, and 50% common stock. It is taxed at a rate of 21%. a. If the market price of the common stock is $40 and dividends are expected to grow at a rate of 6% per year for the foreseeable future, what is the required return on the company's common stock, and thus the company's cost of retained earnings financing? b. If underpricing and flotation costs on new shares of common stock amount to $7.00 per share, what is the company's cost of new common stock financing? c. The company can issue a $2.00 dividend preferred stock for a market price of $25.00 per share. Flotation costs would amount to $3.00 per share. What is the cost of preferred stock financing? d. The company can issue $1,000-par-value, 10% coupon, 5-year bonds that can be sold for $1,200 each. Flotation costs would amount to $25.00 per bond. Use the estimation formula to figure the approximate cost of debt financing. e. What is the WACC? P9-17 Calculation of individual costs and WACC Dillon Labs has asked its financial man- ager to measure the cost of each specific type of capital as well as the weighted average cost of capital (WACC). The WACC is to be measured by using the following weights: 40% long-term debt, 10% preferred stock, and 50% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 21%.