Question

Calculation of individual costs and WACC   Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following​ weights:

3030​%

​long-term debt,

2020​%

preferred​ stock, and

5050​%

common stock equity​ (retained earnings, new common​ stock, or​ both). The​ firm's tax rate is

2222​%.

Debt The firm can sell for

​$10001000

a

1212​-year,

​$1 comma 0001,000​-par-value

bond paying annual interest at a

9.009.00​%

coupon rate. A flotation cost of

44​%

of the par value is required.Preferred stock  

9.509.50​%

​(annual dividend) preferred stock having a par value of

​$100100

can be sold for

​$8888.

An additional fee of

​$66

per share must be paid to the underwriters.Common stock  The​ firm's common stock is currently selling for

​$7070

per share. The stock has paid a dividend that has gradually increased for many​ years, rising from

​$2.252.25

ten years ago to the

​$3.843.84

dividend​ payment,

Upper D 0D0​,

that the company just recently made. If the company wants to issue new new common​ stock, it will sell them

​$3.503.50

below the current market price to attract​ investors, and the company will pay

​$4.004.00

per share in flotation costs.  

a.  Calculate the​ after-tax cost of debt.

b.  Calculate the cost of preferred stock.

c.  Calculate the cost of common stock​ (both retained earnings and new common​ stock).

d.  Calculate the WACC for Dillon Labs.

.  The​ after-tax cost of debt using the​ bond's yield to maturity​ (YTM) is

nothing ​%.

​(Round to two decimal​ places.)

The​ after-tax cost of debt using the approximation formula is

nothing ​%.

​(Round to two decimal​ places.)

b.  The cost of preferred stock is

nothing ​%.

​(Round to two decimal​ places.)

c.  The cost of retained earnings is ​xx% Round to two decimal​ places.)

The cost of new common stock is xx %.

​(Round to two decimal​ places.)

d.  Using the cost of retained​ earnings, the​ firm's WACC is

xx ​%.

​(Round to two decimal​ places.)

Using the cost of new common​ stock, the​ firm's WACC is

xx ​%.

​(Round to two decimal​ places.)

Answer 1

As per rules I am answering the first 4 subparts of the question

1: Using financial calculator

Input: FV= 1000, PMT=9%*1000 = 90

N = 12

PV = -(1000*(1-4%)) = -960

Solve for I/Y as 9.57

After tax cost of debt = 9.57%*(1-22% ) = 7.47%

2: cost of preferred stock= Annual dividend/Price after flotation

= 9.5%*100/ (88-6)

= 11.59%

3: Growth rate=g = 5.49%

(Using rate function in excel as per image)

Cost of retained earnings = D1/Price + growth

= 3.84*105.49%/70+ 5.49%

= 11.28%

Cost of new common stock = D1/Net Price + growth

= 3.84*105.49%/(70-3.5-4) + 5.49%

=11.97%

4:i: WACC using retained earnings = 7.47%*30% + 11.59%*20%+ 11.28%*50%

= 10.2%

ii:WACC using new stock = 7.47%*30% + 11.59%*20%+ 11.97%*50%

=10.54%

Growth rate