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:

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 25​%.Debt The firm can sell for ​$1015a 10​-year, ​$1 comma 000​-par-value bond paying annual interest at a 9.00​% coupon rate. A flotation cost of 2.5​% of the par value is required.Preferred stock  7.00​% ​(annual dividend) preferred stock having a par value of ​$100can be sold for ​$92. An additional fee of ​$4per share must be paid to the underwriters.Common stock  The​ firm's common stock is currently selling for ​$90per share. The stock has paid a dividend that has gradually increased for many​ years, rising from

​$3.00ten years ago to the ​$4.44dividend​ payment, Upper D 0​, that the company just recently made. If the company wants to issue new new common​ stock, it will sell them ​$1.50below the current market price to attract​ investors, and the company will pay ​$4.00per 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 Lab

Answer 1

Please refer to the attachment for the solution to the above question.