Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the
weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 10% preferred stock, and
50% common stock equity (retained eamings, new common stock, or both). The firm's tax rate is 21%
Debt The firm can sell for $1020 a 10-year, $1,000-par-value bond paying annual interest at a 7.00% coupon rate: A flotation cost of 3% of the par value is
required.
Preferred stock 8.00% (annual dividend) preferred stock having a par value of $100 can be sold for $98. An additional fee of $2 per share must be paid to the
underwriters
Common stock The firm's common stock is currently selling for 559 43 per share. The stock has paid a dividend that has gradually increased for many years,
rising from $2.70 ten years ago to the $4.00 dividend payment, Do, that the company just recently made. If the company wants to issue new new common stock,
it will sell them $1.50 below the current market price to attract investors, and the company will pay $2.00 per share in Botation costs
a. Calculate the after-tax cost of debt
AY
The after-tax cost of debt using the approximation formula is 5.64% (Round to two decimal places.)
b. The cost of prefem
tock is 8 33% (Round to two decimal places)
c. The cost of retained earnings is
(Round to two decimal places)
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Transcribed Image Text:Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 10% preferred stock, and 50% common stock equity (retained eamings, new common stock, or both). The firm's tax rate is 21% Debt The firm can sell for $1020 a 10-year, $1,000-par-value bond paying annual interest at a 7.00% coupon rate: A flotation cost of 3% of the par value is required. Preferred stock 8.00% (annual dividend) preferred stock having a par value of $100 can be sold for $98. An additional fee of $2 per share must be paid to the underwriters Common stock The firm's common stock is currently selling for 559 43 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.70 ten years ago to the $4.00 dividend payment, Do, that the company just recently made. If the company wants to issue new new common stock, it will sell them $1.50 below the current market price to attract investors, and the company will pay $2.00 per share in Botation costs a. Calculate the after-tax cost of debt AY The after-tax cost of debt using the approximation formula is 5.64% (Round to two decimal places.) b. The cost of prefem tock is 8 33% (Round to two decimal places) c. The cost of retained earnings is (Round to two decimal places)
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