Cost of capital Edna Recording Studios, inc., reported earnings available to com
ID: 2618230 • Letter: C
Question
Cost of capital Edna Recording Studios, inc., reported earnings available to common stock of $5.00000 as year. From hose earmings, the company paid a dividend of $1.29 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 30% dett, 20% preterred stock, and 5 % common stock its a ed at nate 0135. a. If the market price of the common stock is S38 and dividends are expected to grow at a rate of 6% per year for he foreseeable future, wit at s the company's cost oreaned earnings financing? b. Ifunderpricing and flotation costs on new shares of common stock amount to $5 per share, what is the company's cost of new common stock financing? C. The company can issue $1.94 dividend preferred stock for a market price of $29 per share. Flotation costs would amount to $5 per share. What is the cost of preferred stock financing? d. The company can issue s 1,000-par-value, 9% coupon, 7-year bonds that can be sold for s 1,150 each. Flotation costs would amount to S35 per bond Use the estimation formula figure the approximate after-tax cost of debt financing? e. What is the WACC a. If the market price of the common stock is S38 and dividends are expected to grow at a rate of 6% per year for he oreseeable future, the company's cost or reta ed earnings financing is [-)% (Round to two decimal places) Round to two decimal b. If underpricing and flotation costs on new shares of common stock amount to S5 per share, the company's cost of new common stock financing is places.) 96 C. If the company can issue $1.94 dividend preferred stock for a market price of $29 per share, and flotation costs would amount to $5 per share, the cost of preferred stock financing is[ % (Round to two decimal places) d. If the company can issue $1,000-par-value 9% coupon, 7-year bonds that can be sold for $1.150 each, and flotation costs would amount to S 35 per bond, using the estimation formula, the appromate after-tax cost of debt financing is L)% (Round to two decimal places.) e. Using the cost of retained earnings. thet m's WACC., is % (Round to two decr al places.)Explanation / Answer
a. Cost of retained earning can be measured as ke = D1/P0 + g
Where : D1 = Expected Dividend at the end of Year 1
P0 = Current Price of the Stock
g = Growth Rate
Therefore, 1.29(1.06)/38 + 0.06
= 9.60%
b. In this case floatation cost will be reduced from the price of the stock while calculating ke
Thus, [1.29(1.06)/38-5] + 0.06
= 10.14%
c. Cost of preferred stock = 1.94/29-5*100
= 8.08%
d. After tax cost of debt = 90 + 1000 - 965
7
1000+0.65(965-1000)
= 95/977.25
= 9.72%
e. WACC = 9.72(0.30)+8.08(0.20)+9.60(0.50)
= 9.332%