Cost of debt-cost of preferred stock-cost of common equity

Assignment Help Financial Management

Reference no: EM131070939

Dillion labs has asked its financial manager to measure the cost of each specific type of capital as welll ass the WACC. The WACC is to be measured by using the following weights: 40% long term debt, 10% preferred stock, and 50% common stock equity(retained earnings, new common stock or both). The firms tax rate is 40%.

Debt: The firm can sell its bonds for $980 a 10 year, 1000 par-value bond paying annual interest at 6% coupon rate. A flotation cost of 2% if the par value is required in addition to the discount of $20 per bond.

Preferred stock: 8% (annual dividend) preferred stock having a par value of $100 can be sold for $85. An additional fee of $2 per share must be paid to the underwriters.

Common Stock: The firm common stock is currently selling for $50 per share. The dividend expected to be paid at the end of the coming year (2010) is $4. Its dividend payments, which have been approximately 60% of earnings per share in each of the past five years, are shown below:

2009 - $3.75

2008 - $3.50

2007 - $3.30

2006 - $3.15

2005 - $2.85

It is expected that to attract buyers, new common stock must be underpriced $5 per share, and the firm must also pay $3 per share in flotation costs. Dividend payments are expected to continue at 60% of earnings.

Question:

a. Cost of debt/ cost of preferred stock/ cost of common equity?

b. break point when retained earnings are exhausted

c. WACC if no new stock

d. WACC if new stock is issued

Reference no: EM131070939

Questions Cloud

Calculating investment returns : Calculating Investment Returns: You bought one of Bergen Manufacturing Co.’s 7 percent coupon bonds one year ago for $943.82. These bonds make annual payments and mature six years from now. Suppose you decide to sell your bonds today when the require..

Explain why star choice of capital structure is irrelevant : Homemade Leverage: Star, Inc., a prominent consumer products firm, is debating whether or not to convert its all-equity capital structure to one that is 50 percent debt. What will Ms. Brown’s cash flow be under the proposed capital structure of the f..

Relevance of the organizational grapevine : Summarize effective communication strategies in organizational hierarchies, and review the role and relevance of the organizational grapevine. Give an example that did or could apply in real life.

Cost of debt-cost of preferred stock-cost of common equity : Dillion labs has asked its financial manager to measure the cost of each specific type of capital as welll ass the WACC. The WACC is to be measured by using the following weights: 40% long term debt, 10% preferred stock, and 50% common stock equity(r..

How many days are in the operating cycle : ABC Corporation currently has an inventory turnover of 44.89, a payables turnover of 8.08, and a receivables turnover of 21.49. How many days are in the operating cycle?

What is the average accounts payable balance : ABC Company has annual sales of $400,000 and cost of goods sold of $264,969. The accounts payable period is 47.42 days. What is the average accounts payable balance?

What is the present worth of series of equal : What is the present worth of a series of equal end-of-month payments of $1,500 if the series extends over a period of eight years at 9% interest compounded quarterly? (Show work)

User Account

All Pages