Calculate the cost of retained earnings

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Reference no: EM131928225

Question: 1. The All-But-Comatose Corporation (ABC) has Common Stock with a current dividend of $3.20 per share that is selling for $78 per share. The dividends are expected to grow at about 4.5% per year into the future. If ABC sells new common stock, they would expect to incur flotation costs of 8% of the proceeds. Calculate the cost of retained earnings and the cost of new common stock for ABC.

2. Assume that ABC (from question #5 above) is financed with: 10% short-term debt with an interest rate of 6%, 25% long term debt (20-year bonds) that have a coupon rate of 8% and are currently selling for $1,165.28 per $1,000 par value, 10% preferred stock with a $4.25 dividend and a market price of $53, and 55% common stock. If they sell new preferred stock, flotation costs would be 6%. Their tax rate is 40%. What is ABC's weighted average cost of capital assuming that they use retained earnings for expansions? What would be the WACC if they instead use new common stock?

Reference no: EM131928225

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