Calculation of individual costa and WACC DIllion 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 cost is to be measured by using the following weights: 40% long term debt, 10% preferred, and 50% common stock equity (retained earnings, new common stock or both). The firm's tax rate is 40%
DEBT the firm can see $980 a 10-year, $1000 par value bond paying annual interest at a 10% coupon rate. A flotation cost of 3% of the par value is requireed in adition to the discount of $20 per bond.
PREFERRED STOCCk 8% (annual dividend) preferred stock having a par value of $100 can be sold for $65. AN additional fee of $2 per share must be paid to the underwriters.
COMMON STOCK The firm's common stock is currently selling for $50 per share. The dividend expected to be paid at the end of the coming year (2016) is $4. Its dividend payments, which have been approximately 60% of earnings per share in each of the past 5 years, were as shown
2015 $3.75
2014 $3.50
2013 $3.30
2012 $3.15
2011 $2.85
It is expected to attract buyers, new common stock must be underpriced $5 per share, and the firm must pay $3 per share in flotation costs. Dividend payments are expected to continue at 60% of earnings.
a. calculate the after tax debt
b. calculate the cost of preferred stock
c. calculate the cost of common stock
d. calculate the WACC for Dillion Labs.
Calculation of individual costa and WACC DIllion 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 cost is to be measured by using the following weights: 40% long term debt, 10% preferred, and 50% common stock equity (retained earnings, new common stock or both). The firm's tax rate is 40%
DEBT the firm can see $980 a 10-year, $1000 par value bond paying annual interest at a 10% coupon rate. A flotation cost of 3% of the par value is requireed in adition to the discount of $20 per bond.
PREFERRED STOCCk 8% (annual dividend) preferred stock having a par value of $100 can be sold for $65. AN additional fee of $2 per share must be paid to the underwriters.
COMMON STOCK The firm's common stock is currently selling for $50 per share. The dividend expected to be paid at the end of the coming year (2016) is $4. Its dividend payments, which have been approximately 60% of earnings per share in each of the past 5 years, were as shown
2015 $3.75
2014 $3.50
2013 $3.30
2012 $3.15
2011 $2.85
It is expected to attract buyers, new common stock must be underpriced $5 per share, and the firm must pay $3 per share in flotation costs. Dividend payments are expected to continue at 60% of earnings.
a. calculate the after tax debt
b. calculate the cost of preferred stock
c. calculate the cost of common stock
d. calculate the WACC for Dillion Labs.
Related questions
Bremond Equipment Supply Corporation (BESC) needs to determine its Weighted Average Cost of Capital in order to make a few capital budgeting decisions. The firm has already established the proporation of its capital. Use these proportions in calculating the firm's WAAC.
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| Target Market |
| Source of Capital | Proportions |
| Long-term debt | 69% |
| Preferred stock | 5% |
| Common stock equity | 26% |
Debt: BESC can sell a 15-year, semi-annual,$1,000 par value, 8.75 percent bond for $985. A flotation cost of 1.75 percent of the face value would be required in addition to the discount of $15.
Preferred Stock: BESC has determined it can issue preferred stock at $70 per share par value. The stock will pay an $8.00 annual dividend. The cost of issuing and selling the stock is $2 per share.
Common Stock: BESC's common stock is currently selling for $42 per share. The dividend expected to be paid at the end of the coming year is $5.35 Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.00. It is expected that to sell, a new common stock issue must be underpriced at $4 per share and the firm must pay $1 per share in flotation costs.
Additionally, the firm's marginal tax rate is 40 percent.
To help determine the firmâs WACC, we will break this problem down into steps:
Calculate the rate for the new bond issue, notice is has semi-annual compounding.
Calculate the after-tax cost of the bond issue.
Calculate the cost of the new issue of preferred stock.
Calculate the growth rate of the common stock dividends.
Calculate the cost of the new common stock issue.
Finally, calculate the firm's weighted average cost of capital assuming the firm has exhausted all retained earnings.
