Calculate the after-tax cost of debt

Assignment Help Finance Basics

Reference no: EM13260118

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
2012 $3.75
2011 3.50
2010 3.30
2009 3.15
2008 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.

Reference no: EM13260118

Questions Cloud

What is the short-run profit outlook for american refineries : What is the short-run profit outlook for American refineries? What is the long-term profit outlook?

Previous process to store the scores in an array : Modify the previous process to store the scores in an array. You will need to use either parallel arrays or a two-dimensional array in order to store the score, slope and rating for each entry. In the loop you created in the previous assignment to re..

How much interest you earn if interest is left to accumulate : You invest $1,000 in a certificate of deposit that matures after 10 years and pays 5 percent interest, which is compounded annually until the certificate matures.

Find out the heat capacity of a bomb calorimeter : Solid benzoic acid, C6H5COOH(s), is often used to determine the heat capacity of a bomb calorimeter, because the constant volume heat of combustion of this compound is known with high precision: qV = ?26.434 kJ/g. When a 2.088 g sample of C6H5COOH..

Calculate the after-tax cost of debt : 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.

The real versus the ideal : The real versus the ideal. How are ideas of the inherent worth of the common man manifest in early 19th century art?

What is the after-tax cost of debt capital : If the corporation sells more bonds it will incur flotation costs of $48 per bond. If the corporate tax rate is 35%, what is the after-tax cost of debt capital?

Personal experience of each learning process : Describe THOUGHTFULLY how you have learned to about how investors think about value and their willingness to deal with financial losses. Give one example from your personal experience of each learning process. (At least one paragraph).

Compare the ancient use and views of authorship : Compare the ancient use and views of authorship (use in a local community, anonymity, and writing in the style of another previous author) with contemporary views of authorship (publicity, copyright laws, citation, plagiarism).

User Account

All Pages