Question

In: Finance

Calculation of individual costs and WACC   Lang Enterprises is interested in measuring its overall cost of...

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

30​%

tax bracket.

Debt  The firm can raise debt by selling

​$1,000​-par-value,

7​%

coupon interest​ rate,

16​-year

bonds on which annual interest payments will be made. To sell the​ issue, an average discount of

​$20

per bond would have to be given. The firm also must pay flotation costs of

​$25

per bond.

Preferred stock  The firm can sell

7.5​%

preferred stock at its

​$100​-per-share

par value. The cost of issuing and selling the preferred stock is expected to be

​$6

per share. Preferred stock can be sold under these terms.

Common stock  The​ firm's common stock is currently selling for

​$65

per share. The firm expects to pay cash dividends of

​$7

per share next year. The​ firm's dividends have been growing at an annual rate of

6​%,

and this growth is expected to continue into the future. To sell new shares of common​ stock, the firm must underprice the stock by

​$5

per​ share, and flotation costs are expected to amount to

$ 3

per 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

​$150,000

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

  the​ after-tax cost of debt 5.24

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

nothing​ 5.24%

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

30​%

tax bracket.

Debt  The firm can raise debt by selling

​$1,000​-par-value,

7​%

coupon interest​ rate,

16​-year

bonds on which annual interest payments will be made. To sell the​ issue, an average discount of

​$20

per bond would have to be given. The firm also must pay flotation costs of

​$25

per bond.

Preferred stock  The firm can sell

7.5​%

preferred stock at its

​$100​-per-share

par value. The cost of issuing and selling the preferred stock is expected to be

​$6

per share. Preferred stock can be sold under these terms.

Common stock  The​ firm's common stock is currently selling for

​$65

per share. The firm expects to pay cash dividends of

​$7

per share next year. The​ firm's dividends have been growing at an annual rate of

6​%,

and this growth is expected to continue into the future. To sell new shares of common​ stock, the firm must underprice the stock by

​$5

per​ share, and flotation costs are expected to amount to

$ 3

per 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

​$150,000

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

  the​ after-tax cost of debt 5.24

ytm 5.24

 Calculate the cost of preferred stock.7.98

Calculate the cost of common stock 16.77

The cost of new common stock is

nothing​ % ?

Solutions

Expert Solution

Debt:

Effective price of the bond = PV = 1,000 - 20 - 25 = 955

PMT = annual coupon = 7% x 1000 = 70

Period = 16 years

FV = Par value = 1000

Hence, YTM = RATE (Period, PMT, PV, FV) = RATE(16,70,-955,1000) = 7.49%

Pre tax cost of debt = Kd = 7.49%

Post tax cost of debt = Kd x (1 - T) = 7.49% x (1 - 30%) = 5.24%

--------------------------

Preferred stock

The firm can sell 7.5​% preferred stock at its ​$100​-per-share par value. The cost of issuing and selling the preferred stock is expected to be ​$6 per share.

Cost of preferred stock = D / P = 7.5% x 100 / (100 - 6) = 7.98%

------------------------

Common stock

The​ firm's common stock is currently selling for ​$65 per share. The firm expects to pay cash dividends of ​$7 per share next year. The​ firm's dividends have been growing at an annual rate of 6​%, and this growth is expected to continue into the future.

Cost of common stock = D1 / P + g = 7 / 65 + 6% = 16.77%

-----------------------------

New common stock

To sell new shares of common​ stock, the firm must underprice the stock by ​$5 per​ share, and flotation costs are expected to amount to $ 3 per share.

Cost of new common stock = D1 / P + g = 7 / (65 - 5 - 3) + 6% = 18.28%
------------------------

Hence your final answers are:

YTM = 7.49%

The​ after-tax cost of debt = 5.24%

The cost of preferred stock = 7.98%

The cost of common stock = 16.77%

The cost of new common stock = 18.28%


Related Solutions

Calculation of individual costs and WACC Lang Enterprises is interested in measuring its overall cost of...
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  ...
Calculation of individual costs and WACC   Lang Enterprises is interested in measuring its overall cost of...
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 30​%tax bracket. Debt  The firm can raise debt by selling ​$1000 par-value, 9​% coupon interest​ rate, 17​-year bonds on which annual interest payments will be made. To sell the​ issue, an average discount of ​$25 per bond would have to be given. The firm also must pay flotation costs of ​$20...
Calculation of individual costs and WACC Lang Enterprises is interested in measuring its overall cost of...
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 24 % tax bracket. Debt The firm can raise debt by selling $1000 -par-value, 9 % coupon interest rate, 17 -year bonds on which annual interest payments will be made. To sell the issue, an average discount of $30 per bond would have to be given. The firm also must pay...
Calculation of individual costs and WACC   Lang Enterprises is interested in measuring its overall cost of...
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 30​% tax bracket. Debt  The firm can raise debt by selling ​$1,000​-par-value, 7​% coupon interest​ rate, 16​-year bonds on which annual interest payments will be made. To sell the​ issue, an average discount of ​$20 per bond would have to be given. The firm also must pay flotation costs of ​$25...
P9–19 Calculation of individual costs and WACC Lang Enterprises is interested in measuring its overall cost...
P9–19 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 21% tax bracket. Debt The firm can raise debt by selling $1,000-par-value, 8% coupon interest rate, 20-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $30 per bond would have to be given. The firm also must pay flotation costs of...
P9–19 Calculation of individual costs and WACC Lang Enterprises is interested in measuring its overall cost...
P9–19 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 21% tax bracket. Debt The firm can raise debt by selling $1,000-par-value, 8% coupon interest rate, 20-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $30 per bond would have to be given. The firm also must pay flotation costs of...
Calculation of individual costs and WACCLang Enterprises is interested in measuring its overall cost of capital....
Calculation of individual costs and WACCLang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data. The firm is in the 27% tax bracket. Debt The firm can raise debt by selling $1,000​-par-value, 8​% coupon interest​ rate,17-year bonds on which annual interest payments will be made. To sell the​ issue, an average discount of $50 per bond would have to be given. The firm also must pay flotation costs of $20 per bond....
Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the...
Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data.  The firm is in the 30% tax bracket. DEBT: The firm can raise debt by selling $1,000 par value, 9% coupon interest rate, 17 year bonds on which annual interest payments will be made.  To sell the issue, an average discount of $25 per bond would have to be given. The firm also must pay flotation costs of $15 per bond. PREFERRED STOCK: The...
Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the...
Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data. The firm is in the 21​% tax bracket. Debt: The firm can raise debt by selling 1,000​-par-value, 8​% coupon interest​ rate, 20​-year bonds on which annual interest payments will be made. To sell the​ issue, an average discount of ​$30 per bond would have to be given. The firm also must pay flotation costs of $30 per bond. Preferred stock: The firm...
Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the...
Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data. The firm is in the 21​% tax bracket. Debt: The firm can raise debt by selling 1,000​-par-value, 8​% coupon interest​ rate, 20​-year bonds on which annual interest payments will be made. To sell the​ issue, an average discount of ​$30 per bond would have to be given. The firm also must pay flotation costs of $30 per bond. Preferred stock: The firm...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT