Question

Calculation of individual costs and WACC Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data. The firm is in the 35​% tax bracket.Debt  The firm can raise debt by selling

​$1,000​-par-value, 5​% coupon interest​ rate, 10​-year bonds on which annual interest payments will be made. To sell the​ issue, an average discount of ​$30per bond would have to be given. The firm also must pay flotation costs of ​$25per bond.Preferred stock  The firm can sell 6​% preferred stock at its ​$100​-per-share par value. The cost of issuing and selling the preferred stock is expected to be ​$4per share. Preferred stock can be sold under these terms. Common stock  The​ firm's common stock is currently selling for

​$80per share. The firm expects to pay cash dividends of ​$5.5per share next year. The​ firm's dividends have been growing at an annual rate of 5​%, and this growth is expected to continue into the future. To sell new shares of common​ stock, the firm must underprice the stock by ​$5per​ share, and flotation costs are expected to amount to $ 5per share. The firm can sell new common stock under these terms. Retained earnings  When measuring this​ cost, the firm does not concern itself with the tax bracket or brokerage fees of owners. It expects to have available ​$120,000 of retained earnings in the coming​ year; once these retained earnings are​ exhausted, the firm will use new common stock as the form of common stock equity financing.

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

a1:( The​ after-tax cost of debt using the approximation formula is ? %)​

a2: (The​ after-tax cost of debt using the​ bond's yield to maturity​ (YTM) is ?%)

b.  Calculate the cost of preferred stock.

c.  Calculate the cost of common stock.

d.  Calculate the​ firm's weighted average cost of capital using the capital structure weights shown in the following​ table,

. ​ (Round answer to the nearest​ 0.01%)

Source of capital

Weigh

Long-term Debt      45%

Preffered Stock       15%

Common stock equity 40%

Total                            100%

Answer 1

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