The cost of preferred stock, Fpr used in the weighted average cost of capital equation is calculated as the preferred dividend, Dpy divided by the current price of the preferred stock, Pp tax adjustment is made when calculating rD because preferred dividends savings are associated with preferred stock. Quantitative Problem: Barton Industries can issue perpetual preferred stock at a price of s49 per share. The stock would pay a constant annual dividend of $3.20 per share. If the firm's marginal tax rate is 25%, what is the company's cost of preferred stock? Round your answar to two decimal places. Quantitative Problem: Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the bond-yield-plus-risk-premium approach, and the DCF model. Barton expects next year's annual dividend, Di, to be $2.20 and it expects dividends to grow at a constant rate 9 = 4.0%. The firm's current common stock price, P0 is $20.00. The current risk-free rate, my, =4.5%; the market risk premium, RPM, =6.2%, and the firm's stock has a current beta, b,=1.20. Assume that the firm's cost of debt, rif, is 14.96%. The firm uses a 3.2% risk premium when arriving at a ballpark estimate of its cost of equity using the bond-yleld-plus-risk-premium approach. What is the firm's cost of equity using each of these three approaches? Round your answers to two decimal places. CAPM cost of equity: Bond yield plus risk premium: DCF cost of equityi What is your best estimate of the firm's cost of equity? Quantitative Problem: Barton Industries expects next year's annual dividend, D1, to be $1,80 and it expects dividends to grow at a constant rate g= 4.2\%. The firm's current common stock price, Po, is $25.00. If it needs to issue new common stock, the firm will encounter a 5.9% flotation cost, F. What is the fotation cost adjustment that must be added to its cost of retained earnings? Do not round intermediate caiculations. Round your answer to two decimal places. What is the cost of new common equity considering the estimate made from the three estimation methodologies? Do not round intermediate calculations. Round your answer to two decimal places. The firm's target capital structure is the mix of debt, preferred stock, and common equity the firm plans to raise funds for its future projects. The target proportions of debt, preferred stock, and common equity, along with the cost of these components, are used to calculate the firm's welghted average cost of capital (WACC). If the firm will not have to issue new common stock, then the cost of retained earnings is used in the firm's WACC calculation. However, If the firm will have to issue new common stock, the cost of new common stock should be used in the firm's Wacc calculation. Quantitative Problem: Barton Industries expects that its target capital structure for raising funds in the future for its capital budget will consist of 40%. debt, 5% preferred stock, and 55% common equity, Note that the firm's marginal tax rate is 25 Fb. Assume that the firm's cost of debt, rid is 10.05, the firm's cost of preferred stock, fp,159.2% and the firm's cost of equity is 12,6%6 for old equity, frr and 13.296 for new equity, re. What is the firm's weighted average cost of capital (WACC 1 ) if it uses retained earnings as its source of common equity? Do not round intermediace calculations. Round your answer to two decimal places. What is the firm's vieighted average cost of capital (WACC j) if it has to lssue new common stock? Do not round intermediate calculations. Round your. nnswer to two decimal places
