Question
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) Now calculate the cost of common equity from retained earnings, using the CAPM method.
C) What is the cost of new common stock based on the CAPM?
D) If Skye continues to use the same market-value capital structure, what is the firm's WACC assuming that (1) it uses only retained earnings for equity? (2) If it expands so rapidly that it must issue new common stock?