Calculation of individual costs and WACC Dillon Labs has asked its financial manager to measure the cost of each specific type capital as well as the Weighted average co of capital.
The weighted average cost is to be measured by using the following weights: 35% long-term debt, 20% preferred stock, and 45% common stock equity (retained eamings, new common stock, or both), The firm's tax rate is 25%.
Debt The firm can sell for $965 a 16-year, $1,000-par-value bond paying a interest at a 6.00% coupon rate. A flotation cost of 3% ofthe par value is required in addition to the discount ofS35 per bond. Preferred stock 7.50% (annual dividend) preferred stock having a par value of $100 can be sold for $80.
An additional fee of $5 per share must be paid to the underwriters. Common stock The firm's common stock is currently selling for $90 per share.
The dividend expected to be paid at the end of the coming year (2016 is $3.77. lts dividend payments, which have been approximately 60% of earnings per share in the past 5 years, were as shown in the following table:
|
Year
|
Dividend
|
|
2015
|
$3.54
|
|
2014
|
$3.32
|
|
2013
|
$3.12
|
|
2012
|
$2.93
|
|
2011
|
$2.75
|
It is expected that to attract buyers, new common stock must be underpriced S4 per share, and the firm must also pay $2.00 per share in fotation costs. Dividend payments are expected to continue at 60% of earnings.
a. Calculate the after-tax cost of debt.
b. Calculate the cost of pretemed stock
c. Calculate the cost of common