Edna Recording​ Studios, Inc., reported earnings available to common stock of ​$4,200,000last year. From those  earnings, the company paid a dividend of ​$1.28 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 30​% debt, 15​% preferred​ stock, and 55​% common stock. It is taxed at a rate of 21​%.   a.  If the market price of the common stock is ​$46 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 ​$7 per​ share, what is the​ company's cost of new common stock financing​? c.  The company can issue ​$2.01 dividend preferred stock for a market price of ​$34 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, 8​% annual​ coupon, 5​-year bonds that can be sold for ​$1,290 each. Flotation costs would amount to ​$20 per bond. What is the​ after-tax cost of debt​ financing? e.  What is the WACC​?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Edna Recording​ Studios, Inc., reported earnings available to common stock of ​$4,200,000last year. From those  earnings, the company paid a dividend of ​$1.28 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 30​% debt, 15​% preferred​ stock, and 55​% common stock. It is taxed at a rate of 21​%.
 
a.  If the market price of the common stock is ​$46 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 ​$7 per​ share, what is the​ company's cost of new common stock financing​?
c.  The company can issue ​$2.01 dividend preferred stock for a market price of ​$34 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, 8​% annual​ coupon, 5​-year bonds that can be sold for ​$1,290 each. Flotation costs would amount to ​$20 per bond. What is the​ after-tax cost of debt​ financing?
e.  What is the WACC​?
 
 
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