Dillon Labs has asked its financial manager to measure the cost of each specific type of...

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Finance

Dillon Labs has asked its financial manager to measure the costof each specific type of capital as well as the weighted averagecost of capital. The weighted average cost is to be measured byusing the following? weights: 50 % ?long-term debt, 25 % preferred?stock, and 25 % common stock equity? (retained earnings, newcommon? stock, or? both). The? firm's tax rate is 23?%.
Debt: The firm can sell for ?$1010 a 16 ?-year, ?$1,000?-par-value bond paying annual interest at a 6.00 % coupon rate. Aflotation cost of 2.5?% of the par value is required.
Preferred stock: 8.50 % ?(annual dividend) preferred stockhaving a par value of ?$100 can be sold for ?$94 . An additionalfee of ?$3 per share must be paid to the underwriters.
Common stock: The? firm's common stock is currently selling for?$90 per share. The stock has paid a dividend that has graduallyincreased for many? years, rising from ?$2.75 ten years ago to the?$5.41 dividend? payment, Upper D 0 ?, that the company justrecently 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 ?$3.50 per share in flotationcosts.??
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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a After tax cost of debt After tax YTM YTM Coupon F P n F P 2 Here F Face value 1000 P Net price Price Flotation cost P 1010 1000 25 P 1010 25 985 n Years 16 years Coupon Face value Coupon rate Coupon 1000 6 60 Tax rate 23 or 023 Now put the values into formula YTM 60 1000 985 16 1000 985 2 YTM 60 09375 99250 YTM 00614 After tax cost of debt YTM 1 Tax rate After See Answer

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Transcribed Image Text

Dillon Labs has asked its financial manager to measure the costof each specific type of capital as well as the weighted averagecost of capital. The weighted average cost is to be measured byusing the following? weights: 50 % ?long-term debt, 25 % preferred?stock, and 25 % common stock equity? (retained earnings, newcommon? stock, or? both). The? firm's tax rate is 23?%.Debt: The firm can sell for ?$1010 a 16 ?-year, ?$1,000?-par-value bond paying annual interest at a 6.00 % coupon rate. Aflotation cost of 2.5?% of the par value is required.Preferred stock: 8.50 % ?(annual dividend) preferred stockhaving a par value of ?$100 can be sold for ?$94 . An additionalfee of ?$3 per share must be paid to the underwriters.Common stock: The? firm's common stock is currently selling for?$90 per share. The stock has paid a dividend that has graduallyincreased for many? years, rising from ?$2.75 ten years ago to the?$5.41 dividend? payment, Upper D 0 ?, that the company justrecently 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 ?$3.50 per share in flotationcosts.??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.