Answered: The cost of retained earnings is…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 11P

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Question

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, 20% preferred stock, and 45% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 21%.

Debt The firm can sell for $1030 a 13-year, $1,000-par-value bond paying annual interest at a 7.00% coupon rate. A flotation cost of 2% of the par value is required.

Preferred stock 8.5% (annual dividend) preferred stock having a par value of $100 can be sold for $90. An additional fee of $4 per share must be paid to the underwriters.

Common stock The firm's common stock is currently selling for $60 per share. The stock has paid a dividend that has gradually increased for many years, rising from $2.75 ten years ago to the $5.41 dividend payment, D0, that the company just recently made. If the company wants to issue 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.

The cost of retained earnings is ____(Round to two decimal places.)

The cost of new common stock is _____(Round to two decimal places.)

Using the cost of retained earnings, the firm's WACC is _____(Round to two decimal places.)

Using the cost of new common stock, the firm's WACC is ______(Round to two decimal places.)

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