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Hello, I am currently reviewing and taking practice problems in preparation of my FIN Final Exam I need some help with the step-by-step break-down of...
Hello, I am currently reviewing and taking practice problems in preparation of my FIN Final Exam I need some help with the step-by-step break-down of how to complete the problem below. I am really at a loss for how to even begin working on this problem, and I can't seem to find the topic section within my textbook. I really just want to be able to understand how, to feel prepared for my exam on Thursday.
Calculation of individual costs and WACC
Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured 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 25%.
Debt The firm can sell for $1030 a 15-year, $1,000-par-value bond paying annual interest at a 9.00% coupon rate. A flotation cost of 4% of the par value is required.
Preferred stock 9.50% (annual dividend) preferred stock having a par value of $100 can be sold for $88. An additional fee of $4 per share must be paid to underwriters.
Common stock The firm's common stock is currently selling for $50 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.25 ten years ago to the $3.33 dividend payment that the company just recently made. If the company wants to issue new new common stock, it will sell them $2.00 below the current market price to attract investors, and the company will pay $3.00 per share in flotation costs.
a. Calculate the after-tax cost of debt.
a. The after-tax cost of debt using the bond's yield to maturity (YTM) is ___ %. (Round to two decimal places.)
b. Calculate the cost of preferred stock. (Round to two decimal places.)
c. Calculate the cost of common stock (both retained earnings and new common stock).
d. Calculate the WACC for Dillon Labs.