In: Finance
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: 30% long-term debt, 10% preferred
stock, and 60% common stock equity (retained earnings, new
common stock, or both). The firm's tax rate is 27%
.Debt The firm can sell for $1015 a 13-year, $1,000 -par-value
bond paying annual interest at a 7.00%coupon rate. A flotation
cost of 4% of the par value is required.
Preferred stock 9.00% (annual dividend) preferred stock having a
par value of $100 can be sold for $88.An additional fee of $6 per
share must be paid to the underwriters.
Common stock The firm's common stock is currently selling for $80
per share. The stock has paid a dividend that has gradually
increased for many years, rising from $2.00 ten years ago to
the$3.26 dividend payment, Upper D0, that the company
just recently made. If the company wants to issue new new common
stock, it will sell them $2.50 below the current market price to
attract investors, and the company will pay $2.00 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.
round to two decimals