Calculate the WACC
Here is the condensed 2015 balance sheet for skype computer company ( in thousands of dollars)
Current assets $2000
Net Fixed assets $3000
Total Assets $5000
Accounts payable and accruals $900
Short-term debt $100
Long term debt $1,100
Preferred stock( 10,000 shares) $ 250
Common Stock ( 50,000 Shares) $ 1,300
Retained earnings $ 1,350
Total common equity $ 2650
Total liabilities and Equity $ 5,000
Skye's earnings per share last year were $3.20. The common stock sells for $55, last years dividend was $2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysis are projecting that the common dividend will grow at an annual rate of 9%. Skye's preferred stocks pays a dividend of $3.30 per share, and its preferred stock sells for $30 per share. The firms before tax cost of the debt is 10% and its marginal tax rate is 35%. The firms currenlty outstanding 10% annual coupon rate, long term debt sells at par value. The market risk premium is 5%, the risk free rate is 6% and skye's beta is 1.516. The firms total debt, which is the sum of the company's short term debt and long term debt, equals $1.2 million.
A) Calculate the cost of each capital component, that is, the after tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity.
B) Calculate the cost of common equity from retained earnings, using the CAMP method.
C) What is the cost of new common stock based on the CAMP?