Calculation of individual costs and WACC: Dillon Labs has asked its financial manager to measure the...

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Calculation of individual costs and WACC:Dillon Labs has asked its financial manager to measure the cost ofeach specific type of capital as well as the weighted average costof capital. The weighted average cost is to be measured by usingthe following? weights:50?% long-term debt, 20% preferred? stock,and 30% common stock equity? (retained earnings, new common? stock,or? both). The? firm's tax rate is 28?%.
Debt: The firm can sell for ?$1010 a 12?-year,?$1000?-par-value bond paying annual interest at a 8.00?% couponrate. A flotation cost of 2?% 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. Anadditional fee of ?$2 per share must be paid to theunderwriters.
Common stock: The? firm's common stock iscurrently selling for ?$60 per share. The stock has paid a dividendthat has gradually increased for many? years, rising from $2.70 tenyears ago to the $4.00 dividend? payment, Upper D 0, that thecompany just recently made. If the company wants to issue new newcommon? stock, it will sell them ?$3.50below the current marketprice to attract? investors, and the company will pay ?$2.50 pershare in flotation costs.??
a.??Calculate the? after-tax cost of debt.
b.??Calculate the cost of preferred stock.
c.??Calculate the cost of common stock? (both retained earningsand new common? stock).
d.??Calculate the WACC for Dillon Labs.

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4.3 Ratings (702 Votes)

Face Value 1000 I Year Coupon Coupon Rate 8 FVCR 1 80 Market Price 1010 FVCR 2 80 Flotation Cost 2 FVCR 3 80 Adjusted Market Price 9898 Market Price 1 Flotation Cost FVCR 4 80 Tax Rate 28 FVCR 5 80 Let Rd be the cost of debt FVCR 6 80 So now discounting the Coupon payments with Rd should be equal to the Adjusted Market price FVCR 7 80 Using Financial Calculator Put See Answer

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Calculation of individual costs and WACC:Dillon Labs has asked its financial manager to measure the cost ofeach specific type of capital as well as the weighted average costof capital. The weighted average cost is to be measured by usingthe following? weights:50?% long-term debt, 20% preferred? stock,and 30% common stock equity? (retained earnings, new common? stock,or? both). The? firm's tax rate is 28?%.Debt: The firm can sell for ?$1010 a 12?-year,?$1000?-par-value bond paying annual interest at a 8.00?% couponrate. A flotation cost of 2?% 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. Anadditional fee of ?$2 per share must be paid to theunderwriters.Common stock: The? firm's common stock iscurrently selling for ?$60 per share. The stock has paid a dividendthat has gradually increased for many? years, rising from $2.70 tenyears ago to the $4.00 dividend? payment, Upper D 0, that thecompany just recently made. If the company wants to issue new newcommon? stock, it will sell them ?$3.50below the current marketprice to attract? investors, and the company will pay ?$2.50 pershare in flotation costs.??a.??Calculate the? after-tax cost of debt.b.??Calculate the cost of preferred stock.c.??Calculate the cost of common stock? (both retained earningsand new common? stock).d.??Calculate the WACC for Dillon Labs.