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:

45​%

​long-term debt,

25​%

preferred​ stock, and

30​%

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

20​%.

Debt The firm can sell for

​$970

a

17​-year,

​$1,000​-par-value

bond paying annual interest at a

9.00​%

coupon rate. A flotation cost of

3​%

of the par value is required in addition to the discount of

​$30

per bond.Preferred stock  

9.00%

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

​$100

can be sold for

​$80

An additional fee of

​$3

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

​$50

per share. The dividend expected to be paid at the end of the coming year​ (2016) is

​$4.41

Its dividend​ payments, which have been approximately 40​%

of earnings per share in the past 5​ years, were as shown in the following​ table:

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.It is expected that to attract​ buyers, new common stock must be underpriced

​$5

per​ share, and the firm must also pay

​$3.50

per share in flotation costs. Dividend payments are expected to continue at

40​%

of earnings. ​ (Assume that

r Subscript rrr​=

r Subscript srs​.)

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

b.  Calculate the cost of preferred stock.

c.  Calculate the cost of common stock.

d.  Calculate the WACC for Dillon Labs.

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

(Click on the icon located on the​ top-right corner of the data table below in order to copy its contents into a​ spreadsheet.)

Year		Dividend
2015		​$4.08
2014		​$3.78
2013		​$3.50
2012		​$3.24
2011		​$3.00

Answer 1

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