Edna Recording? Studios, Inc., reported earnings available to common stock of ?$5,000,000 last year. From those? earnings, the...

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Finance

Edna Recording? Studios, Inc., reported earnings available tocommon stock of
?$5,000,000
last year. From those? earnings, the company paid a dividendof
?$1.15
on each of its
1,000,000
common shares outstanding. The capital structure of the companyincludes
45?%
?debt,
10?%
preferred? stock, and
45?%
common stock. It is taxed at a rate of
30?%.
?If the market price of the common stock is
?$31
and dividends are expected to grow at a rate of
9?%
per year for the foreseeable? future, what is the? company'scost of retained earnings
financing? 13.04
?If underpricing and flotation costs on new shares of commonstock amount to
?$7
per? share, what is the? company's cost of new common stock
financing? 14.22
The company can issue
?$1.65
dividend preferred stock for a market price of
?$35
per share. Flotation costs would amount to
?$5
per share. What is the cost of preferred stock
financing? 5.50
The company can issue
?$1,000?-par-value, 6?%
?coupon,
14?-year
bonds that can be sold for
?$1,160
each. Flotation costs would amount to
?$25
per bond. Use the estimation formula to figure the approximate?after-tax cost of debt?financing 3.30
?Using the cost of retained? earnings,
r Subscript rrr?,
the? firm's WACC,
r Subscript ara?,
is
nothing? ?

Answer & Explanation Solved by verified expert

4.4 Ratings (733 Votes)

a Cost of common stock ie cost of retained earnings D1Price F g Here g growth 9 or 009 D1 Expected dividend Dividend growth g D1 115 115 9 D1 12535 Price 31 F Flotation cost 7 Now Cost of common stock 1253531 7 009 Cost of See Answer

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Transcribed Image Text

Edna Recording? Studios, Inc., reported earnings available tocommon stock of?$5,000,000last year. From those? earnings, the company paid a dividendof?$1.15on each of its1,000,000common shares outstanding. The capital structure of the companyincludes45?%?debt,10?%preferred? stock, and45?%common stock. It is taxed at a rate of30?%.?If the market price of the common stock is?$31and dividends are expected to grow at a rate of9?%per year for the foreseeable? future, what is the? company'scost of retained earningsfinancing? 13.04?If underpricing and flotation costs on new shares of commonstock amount to?$7per? share, what is the? company's cost of new common stockfinancing? 14.22The company can issue?$1.65dividend preferred stock for a market price of?$35per share. Flotation costs would amount to?$5per share. What is the cost of preferred stockfinancing? 5.50The company can issue?$1,000?-par-value, 6?%?coupon,14?-yearbonds that can be sold for?$1,160each. Flotation costs would amount to?$25per bond. Use the estimation formula to figure the approximate?after-tax cost of debt?financing 3.30?Using the cost of retained? earnings,r Subscript rrr?,the? firm's WACC,r Subscript ara?,isnothing? ?