Dillion labs has asked its financial manager to measure the cost of each specific type of capital as welll ass the WACC. The WACC is to be measured by using the following weights: 40% long term debt, 10% preferred stock, and 50% common stock equity(retained earnings, new common stock or both). The firms tax rate is 40%.
Debt: The firm can sell its bonds for $980 a 10 year, 1000 par-value bond paying annual interest at 6% coupon rate. A flotation cost of 2% if the par value is required in addition to the discount of $20 per bond.
Preferred stock: 8% (annual dividend) preferred stock having a par value of $100 can be sold for $85. An additional fee of $2 per share must be paid to the underwriters.
Common Stock: The firm common stock is currently selling for $50 per share. The dividend expected to be paid at the end of the coming year (2010) is $4. Its dividend payments, which have been approximately 60% of earnings per share in each of the past five years, are shown below:
2009 - $3.75
2008 - $3.50
2007 - $3.30
2006 - $3.15
2005 - $2.85
It is expected that to attract buyers, new common stock must be underpriced $5 per share, and the firm must also pay $3 per share in flotation costs. Dividend payments are expected to continue at 60% of earnings.
Question:
a. Cost of debt/ cost of preferred stock/ cost of common equity?
b. break point when retained earnings are exhausted
c. WACC if no new stock
d. WACC if new stock is issued