### Measure the cost of each specific type

Assignment Help Corporate Finance
##### Reference no: EM13509867

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: 40% long-term debt, 10% preferred stock, and 50% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 40%.

Debt The firm can sell for \$980 a 10-year, \$1,000-par-value bond paying annual interest at a 10% coupon rate. A flotation cost of 3% of the par value is required in addition to the discount of \$20 per bond.

Preferred stock Eight percent (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 (2013) is \$4. Its dividend payments, which have been approximately 60% of earnings per share in each of the past 5 years, were as shown in the following table.

Year Dividend
2015 \$3.75
2014 3.50
2013 3.30
2012 3.15
2011 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. (Assume that Rr=Rs.)

a. Calculate the after-tax cost of debt.

b. Calculate the cost of preferred stock.

c. Calculate the cost of common stock.

d. Calculate the WACC for Dillon Labs

P9-5 The cost of debt Gronseth Drywall Systems, Inc., is in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the firm that different maturities will carry different coupon rates and sell at different prices. The firm must choose among several alternatives. In each case, the bonds will have a \$1,000 par value and flotation costs will be \$30 per bond. The company is taxed at a rate of 40%. Calculate the after-tax cost of financing with each of the following alternatives.

P8-27
Portfolio return and beta Jamie Peters invested \$100,000 to set up the following
portfolio 1 year ago.
Asset Cost Beta at purchase Yearly income Value today
A \$20,000 0.80 \$1,600 \$20,000
B 35,000 0.95 1,400 36,000
C 30,000 1.50 - 34,500
D 15,000 1.25 375 16,500
a. Calculate the portfolio beta on the basis of the original cost figures.
b. Calculate the percentage return of each asset in the portfolio for the year.
c. Calculate the percentage return of the portfolio on the basis of original cost,
using income and gains during the year.
d. At the time Jamie made his investments, investors were estimating that the market
return for the coming year would be 10%. The estimate of the risk-free rate of return
averaged 4% for the coming year. Calculate an expected rate of return for each stock
on the basis of its beta and the expectations of market and risk-free returns.
e. On the basis of the actual results, explain how each stock in the portfolio performed
relative to those CAPM-generated expectations of performance. What
factors could explain these differences?

#### The simple capm is valid and all portfolios are priced

If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below is possible? Consider each situation independently, and assume the risk

#### Discuss how diversification reduces risk

Discuss how diversification reduces risk. Comment on the beta of a portfolio with a large number of randomly selected stocks. (Hint: your discussion should include the incre

#### Discuss why is the goal of financial management to maximize

Discuss why is the goal of financial management to maximize the current share price of the company’s stock? In others words, why isn’t the goal to maximize the future share pr

#### Each bank in a city employs attorneys on retainer

Each bank in a city employs attorneys on retainer basis for \$100 per year. Each bank then refers its customers to its attorney who charges such customers a fee for his service

#### The usefulness and limitations of bonds ratings

How certain features (characteristics) of bonds affect their risk and hence return. Also discuss the usefulness and limitations of bonds ratings. How would these factors c

#### The couple buys two starbuck''s café lattes per day

5.1. A couple is told that to retire comfortably they will need to accumulate a nest egg of about \$1 million dollars. Is this an insurmountable hurdle? How much would two

#### Levels of corporate earnings before taxes

a. Find the marginal tax rate for the following levels of corporate earnings before taxes: \$11,000, \$81,600, \$304,000, \$496,000, \$1,300,000, \$9/3 million, and \$20.4 milli

#### Write statement of stockholders equity

The information from these statements is used to analyze and establish budgets, forecast, variance reports, and ratios, among other things, with the key being that they are