Question: Underwriters 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: 35% Long-term Debt, 25% Preferred Stock, And 40% Common Stock Equity (retained …

## Transcribed Image Text from this Question

underwriters 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: 35% long-term debt, 25% preferred stock, and 40% common stock equity (retained earnings, new common stock, or both). The firm’s tax rate is 27%. Debt The firm can sel for $1025 a 12-year, $1,000-par-value bond paying annual interest at a 6.00% coupon rate. A flotation cost of 2% of the par value is required. Preferred stock 8.50% (annual dividend) preferred stock having a par value of $100 can be sold for $96. An additional fee of $2 per shu ust be paid to the 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 $2.50 ton years ago to the $3.70 dividend payment, Do that the company just recently made. If the company wants to issue now new common stock, it will sell them $3.50 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 cont of debt. b. Calculate the cost of preferred stock. and the admin that it is The after-tax cost of debt using the bord’s yield to maturity (YTM) is 434 % (Round to two decimal places) The after-tax cost of debt using the approximation formula is 4.33 %. (Round to two decimal places.) b. The cont preferred stock is 9.04 % (Round to two decimal places) c. The cost of retained damings is 8.81% (Round to two decimal places.) The cost of new common stock is 917% (Round to two decimal places.) d. Using the cost of retaineu earnings, the firm’s WACC is % (Round to two decimal places.)