Calculation of individual costs and WACC???Lang Enterprises is interested in measuring its overall cost of capital....

80.2K

Verified Solution

Question

Finance

Calculation of individual costs and WACC???Lang Enterprises isinterested in measuring its overall cost of capital. Currentinvestigation has gathered the following data. The firm is inthe
30?%
tax bracket.
Debt??The firm can raise debt by selling
?$1,000?-par-value,
7?%
coupon interest? rate,
16?-year
bonds on which annual interest payments will be made. To sellthe? issue, an average discount of
?$20
per bond would have to be given. The firm also must payflotation costs of
?$25
per bond.
Preferred stock??The firm can sell
7.5?%
preferred stock at its
?$100?-per-share
par value. The cost of issuing and selling the preferred stockis expected to be
?$6
per share. Preferred stock can be sold under these terms.
Common stock??The? firm's common stock is currently sellingfor
?$65
per share. The firm expects to pay cash dividends of
?$7
per share next year. The? firm's dividends have been growing atan annual rate of
6?%,
and this growth is expected to continue into the future. To sellnew shares of common? stock, the firm must underprice the stockby
?$5
per? share, and flotation costs are expected to amount to
$ 3
per share. The firm can sell new common stock under theseterms.
Retained earnings??When measuring this? cost, the firm does notconcern itself with the tax bracket or brokerage fees of owners. Itexpects to have available
?$150,000
of retained earnings in the coming? year; once these retainedearnings are? exhausted, the firm will use new common stock as theform of common stock equity financing
? the? after-tax cost of debt 5.24
The? after-tax cost of debt using the? bond's yield to maturity?(YTM) is
nothing? 5.24%
Calculation of individual costs and WACC???Lang Enterprises isinterested in measuring its overall cost of capital. Currentinvestigation has gathered the following data. The firm is inthe
30?%
tax bracket.
Debt??The firm can raise debt by selling
?$1,000?-par-value,
7?%
coupon interest? rate,
16?-year
bonds on which annual interest payments will be made. To sellthe? issue, an average discount of
?$20
per bond would have to be given. The firm also must payflotation costs of
?$25
per bond.
Preferred stock??The firm can sell
7.5?%
preferred stock at its
?$100?-per-share
par value. The cost of issuing and selling the preferred stockis expected to be
?$6
per share. Preferred stock can be sold under these terms.
Common stock??The? firm's common stock is currently sellingfor
?$65
per share. The firm expects to pay cash dividends of
?$7
per share next year. The? firm's dividends have been growing atan annual rate of
6?%,
and this growth is expected to continue into the future. To sellnew shares of common? stock, the firm must underprice the stockby
?$5
per? share, and flotation costs are expected to amount to
$ 3
per share. The firm can sell new common stock under theseterms.
Retained earnings??When measuring this? cost, the firm does notconcern itself with the tax bracket or brokerage fees of owners. Itexpects to have available
?$150,000
of retained earnings in the coming? year; once these retainedearnings are? exhausted, the firm will use new common stock as theform of common stock equity financing
? the? after-tax cost of debt 5.24
ytm 5.24
?Calculate the cost of preferred stock.7.98
Calculate the cost of common stock 16.77
The cost of new common stock is
nothing? % ?

Answer & Explanation Solved by verified expert

4.1 Ratings (771 Votes)

Debt Effective price of the bond PV 1000 20 25 955 PMT annual coupon 7 x 1000 70 Period 16 years FV Par value 1000 Hence YTM RATE Period PMT PV FV RATE16709551000 749 Pre tax cost of debt Kd 749 Post tax cost of debt Kd x 1 See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Calculation of individual costs and WACC???Lang Enterprises isinterested in measuring its overall cost of capital. Currentinvestigation has gathered the following data. The firm is inthe30?%tax bracket.Debt??The firm can raise debt by selling?$1,000?-par-value,7?%coupon interest? rate,16?-yearbonds on which annual interest payments will be made. To sellthe? issue, an average discount of?$20per bond would have to be given. The firm also must payflotation costs of?$25per bond.Preferred stock??The firm can sell7.5?%preferred stock at its?$100?-per-sharepar value. The cost of issuing and selling the preferred stockis expected to be?$6per share. Preferred stock can be sold under these terms.Common stock??The? firm's common stock is currently sellingfor?$65per share. The firm expects to pay cash dividends of?$7per share next year. The? firm's dividends have been growing atan annual rate of6?%,and this growth is expected to continue into the future. To sellnew shares of common? stock, the firm must underprice the stockby?$5per? share, and flotation costs are expected to amount to$ 3per share. The firm can sell new common stock under theseterms.Retained earnings??When measuring this? cost, the firm does notconcern itself with the tax bracket or brokerage fees of owners. Itexpects to have available?$150,000of retained earnings in the coming? year; once these retainedearnings are? exhausted, the firm will use new common stock as theform of common stock equity financing? the? after-tax cost of debt 5.24The? after-tax cost of debt using the? bond's yield to maturity?(YTM) isnothing? 5.24%Calculation of individual costs and WACC???Lang Enterprises isinterested in measuring its overall cost of capital. Currentinvestigation has gathered the following data. The firm is inthe30?%tax bracket.Debt??The firm can raise debt by selling?$1,000?-par-value,7?%coupon interest? rate,16?-yearbonds on which annual interest payments will be made. To sellthe? issue, an average discount of?$20per bond would have to be given. The firm also must payflotation costs of?$25per bond.Preferred stock??The firm can sell7.5?%preferred stock at its?$100?-per-sharepar value. The cost of issuing and selling the preferred stockis expected to be?$6per share. Preferred stock can be sold under these terms.Common stock??The? firm's common stock is currently sellingfor?$65per share. The firm expects to pay cash dividends of?$7per share next year. The? firm's dividends have been growing atan annual rate of6?%,and this growth is expected to continue into the future. To sellnew shares of common? stock, the firm must underprice the stockby?$5per? share, and flotation costs are expected to amount to$ 3per share. The firm can sell new common stock under theseterms.Retained earnings??When measuring this? cost, the firm does notconcern itself with the tax bracket or brokerage fees of owners. Itexpects to have available?$150,000of retained earnings in the coming? year; once these retainedearnings are? exhausted, the firm will use new common stock as theform of common stock equity financing? the? after-tax cost of debt 5.24ytm 5.24?Calculate the cost of preferred stock.7.98Calculate the cost of common stock 16.77The cost of new common stock isnothing? % ?