Calculate the individual costs and wacc

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Reference no: EM13890726

Calculate the 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: 50% long term, 20% preferred stock, and 30% common stock equity (retained earnings, new common stock, or both). The firm's tax rate is 25%. Debt. The firm can sell for $965 a 18-year, $1,000 par value bond paying annual interest at a 7.00% coupon rate. A flotation cost of 2.5% of the par value is required in addition to the discount of $35 per bond. Preferred Stock 10.00% (annual dividend) preferred stock having a par value of $100 can be sold for $75. An additional fee of $5 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 $2.55. Its dividend payments, which have approximately 60% of earnings per share in the past 5 years, were as follows: Year Dividend 2015 $2.43 2014 $2.32 2013 $2.21 2012 $2.10 2011 $2.00 It is expected that to attract buyers, new common stock must be underpriced $6 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) Please provide step by step instructions to calculate the following: a. The after-tax cost of debt using the bond's yield to maturity (YTM) is _____% (Round two decimal places.) b. Cost of preferred stock. c. Cost of common stock. d. WACC for Dillon Labs

Reference no: EM13890726

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