Calculate the cost of preferred stock-cost of common stock

Assignment Help Financial Accounting

Reference no: EM131250429

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: 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 (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 in the following table.

Year Dividend

2015 $3.75

2014 3.50

2013 3.30

2012 3.15

2011 2.85

LG 3 LG 4

LG 5 LG 6

LG 3 LG 4

LG 5 LG 6

ISBN 1-269-86847-0

388 PART 4 Risk and the Required Rate of Return

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.

Reference no: EM131250429

Questions Cloud

Example of what type of forecasting-static or dynamic : Congress would like to increase tax revenues by 6.5 percent . Assume that the average taxpayer in the United States earns $57, 000 and pays an average tax rate of 20 percent. 1. If the income effect is in effect for all taxpayers, what average tax ra..

Estimate of the total variable manufacturing cost per unit : Carbaugh Corporation has provided the following production and average cost data for two levels of monthly production volume. The company produces a single product. The best estimate of the total variable manufacturing cost per unit is:

What is the ending work in process inventory balance : Crockett Company had a beginning work in process inventory balance of $33175. During the year, $77,000 of direct materials were placed into production. Direct labor was $60036, and indirect labor was $19,500. Manufacturing overhead is allocated at 13..

Briefly explain what the credit spread represents : Bond A, a $1000 corporate bond with a 5.4% coupon rate, semi--annual coupons, and 30 years to maturity has a YTM of 7.0% APR. Treasuries are currently yielding 2.9%. What is the credit spread on bond A? Briefly explain what the credit spread represe..

Calculate the cost of preferred stock-cost of common stock : 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 follow..

Point of publication metod of accounting : Consider the role of an upper manager at Dex. Do you believe that a "point of publication" metod of accounting is allowable under Generally Accepted Accounting Principles?

Do you think this is a wise investment of ibm human resour : If you calculate the person-hours devoted to IBM's team projects, they amount to more than 180,000 hours of management time each year. Do you think this is a wise investment of IBM's human resources? Why or why not?

Stockholders equity section of the balance sheet : The stockholders’ equity section of Nilsson Corporation’s balance sheet as of December 31, 2014 is as follows: Make all necessary journal entries for Nilsson to account for the transactions affecting stockholders’ equity. Prepare the December 31, 201..

Understanding of fraud risk assessment : Consult Paragraphs 65-66 of PCAOB Auditing Standard No. 12. Based on your understanding of fraud risk assessment, what three conditions are likely to be present when fraud occurs (the fraud triangle)? Based on the information provided in the case, wh..

User Account

All Pages