??Dillon Labs has asked its financial manager to measure thecost of each specific type of capital as well as the weightedaverage cost of capital. The weighted average cost is to bemeasured by using the following? weights:
45%
?long-term debt,
15?%
preferred? stock, and
40?%
common stock equity? (retained earnings, new common? stock, or?both). The? firm's tax rate is
23?%.
Debt The firm can sell for
?$1015
a
12-year,
?$1,000?-par-value
bond paying annual interest at a
7.00?%
coupon rate. A flotation cost of
44?%
of the par value is required.
Preferred stock??
8.00%
?(annual dividend) preferred stock having a par value of
?$100
can be sold for
?$88
An additional fee of
?$5
per share must be paid to the underwriters.
Common stock??The? firm's common stock is currently sellingfor
?$60
per share. The stock has paid a dividend that has graduallyincreased for many? years, rising from
?$2.75
ten years ago to the
?$4.70
dividend? payment,
Upper D 0D0?,
that the company just recently made. If the company wants toissue new new common? stock, it will sell them
?$2.00
below the current market price to attract? investors, and thecompany will pay
?$4.00
per share 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.
a.??The? after-tax cost of debt using the? bond's yield tomaturity? (YTM) is _____ ?%.
?(Round to two decimal? places.)
The? after-tax cost of debt using the approximation formula is____%.
?(Round to two decimal? places.)
b.??The cost of preferred stock is _____ ?%.
?(Round to two decimal? places.)
c.??The cost of retained earnings is ____?%.
?(Round to two decimal? places.)
The cost of new common stock is _____?%.
?(Round to two decimal? places.)d.??
Using the cost of retained? earnings, the? firm's WACC is____%.
?(Round to two decimal? places.)
Using the cost of new common? stock, the? firm's WACC is
___ ?%.
?(Round to two decimal? places.)
