Calculation of individual costs and WACC
Lang Enterprises is interested in measuring its overall cost of capital. Current investigation has gathered the following data.The firm is in the 40% tax bracket.Debt The firm can raise debt by selling $1,000-par-value, 8% coupon interestrate, 20-year bonds on which annual interest payments will be made. To sell theissue, an average discount of $30 per bond would have to be given. The firm alsomust pay flotation costs of $30 per bond.Preferred stock The firm can sell 8% preferred stock at its $95-per-share parvalue. The cost of issuing and selling the preferred stock is expected to be $5 pershare. Preferred stock can be sold under these terms.Common stock The firm’s common stock is currently selling for $90 per share.The firm expects to pay cash dividends of $7 per share next year. The firm’s dividendshave been growing at an annual rate of 6%, and this growth is expected tocontinue into the future. The stock must be underpriced by $7 per share, andflotation costs are expected to amount to $5 per share. The firm can sell newcommon stock under these terms.Retained earnings When measuring this cost, the firm does not concern itselfwith the tax bracket or brokerage fees of owners. It expects to have available$100,000 of retained earnings in the coming year; once these retained earnings are exhausted, the firm will use new common stock as the form of common stockequity financing.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 firm’s weighted average cost of capital using the capital structureweights shown in the following table. (Round answer to the nearest 0.1%.)
Source of capital WeightLong-term debt 30%Preferred stock 20Common stock equity 50Total 100%
Already registered? Login
Not Account? Sign up
Enter your email address to reset your password
Back to Login? Click here