Cost of capital
Edna Recording? Studios, Inc., reported earnings available to common stock of ?$4,000,000 last year. From those? earnings, the company paid a dividend of ?$1.23
on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 40?% ?debt, 25?% preferred? stock, and 35?% common stock. It is taxed at a rate of 35?%.
a. If the market price of the common stock is ?$40 and dividends are expected to grow at a rate of 5?% per year for the foreseeable? future, the ?company's cost of retained earnings financing is _____%. ?(Round to two decimal? places.)
b. If underpricing and flotation costs on new shares of common stock amount to ?$5 per? share, the? company's cost of new common stock financing is _____%. ?(Round to two decimal? places.)
c. If the company can issue ?$2.39 dividend preferred stock for a market price of ?$31 per? share, and flotation costs would amount to ?$2 per? share, the cost of preferred stock financing is _____%. (Round to two decimal? places.)
d. If the company can issue ?$1,000?-par-value, 7?% ?coupon, 7?-year bonds that can be sold for ?$1,170 ?each, and flotation costs would amount to ?$25 per? bond, using the estimation? formula, the approximate? after-tax cost of debt financing is _____?%. ?(Round to two decimal? places.)
e. Using the cost of retained? earnings, r Subscript rrr?, the? firm's WACC, r Subscript ara?, is ______%. ?(Round to two decimal? places.)
Using the cost of new common? stock, r Subscript nrn?, the? firm's WACC, r Subscript ara?, is _____?%. ?(Round to two decimal? places.)