Qusetion: Calculation of individual costs and WACC Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data. The firm is in the 30% tax bracket.
Debt: The firm can raise debt by selling $1,000 par value, 7% coupon rate, 12-year bonds on which annual interest payments will be made. To sell the? issue, an average discount of $20 per bond would have to be given. The firm also must pay flotation costs of $30 per bond.
Preferred stock The firm can sell 8% preferred stock at its $95-per-share par value. The cost of issuing and selling the preferred stock is expected to be $8 per share. Preferred stock can be sold under these terms.
Common stock The firm's common stock is currently selling for $70 per share. The firm expects to pay cash dividends of $8 per share next year. The? firm's dividends have been growing at an annual rate of 6% and this growth is expected to continue into the future. To sell new shares of common stock, the firm must underprice the stock by $5 per share, and flotation costs are expected to amount to $4 per share. The firm can sell new common stock under these terms.
Retained earnings When measuring this cost, the firm does not concern itself with the tax bracket or brokerage fees of owners. It expects to have available ?$120,000 of retained earnings in the coming? year; once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing.
a. Calculate the after-tax cost of debt.
The after-tax cost of debt using the approximation formula is ____ (Round to two decimal places.)
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.
The cost of preferred stock is _____ (Round to two decimal places.)
c. Calculate the cost of common stock.
The cost of retained earnings is _____ (Round to two decimal places.)
The cost of new common stock is ____ (Round to two decimal places.)
d. Calculate the firm's weighted average cost of capital using the capital structure weights shown in the following table:
Using the cost of retained? earnings, the? firm's WACC is _____ (Round to two decimal places.)
Using the cost of new common? stock, the? firm's WACC is ______ (Round to two decimal places.)
| Source of Capital |
Weight |
| Long-term debt |
30% |
| Preferred stock |
20% |
| Common stock equity |
50% |
| Total |
100%
|