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Do Homework - Cristian Clementi - Google Chrome Secure | https://www.mathxl.com yerHomework.aspx?homeworkId=448577574&questionld; = 7&flushed; = true&cldzd7042; 37&centerwinsyes; FIN-350-MWF1230A-Fundamentals of Business Financs Cristian Clementi 12/7/17 1:43 PM Homework: Module 7: Chapter 9 Score: 333 0 5 pts P9-16 (similar to) Save 7 of 8 (6 complete HW Score: 64.58%, 25.83 of 40 pts Question Help Cost of capital Edna Recording Studios, Inc., reported earnings available to common stock of $4,400,000 last year. From those earnings, the company paid a dividend of $1.16 on each of its 1,000,000 common shares outstanding The capital structure of the company includes 30% debt, 15% preferred stock and 55% common stock. It is taxed at a rate of 35%. a. If the market price of the common stock is $44 and drvidends are expected to grow at a rate of 8% per year for the foreseeable fu ure what is the compan s cost ofreta ned earnings financing? b. If underpricing and flotation costs on new shares of common stock amount to $6 per share, what is the company's cost of new common stock inancing c. The company can issue $2.44 dividend preferred stock for a market price of $27 per share. Flotation costs would amount to $6 per share. What is the cost of preferred stock financing? d. The company can issue S1,000-par-value, 10% coupon, 6-year bonds that can be sold for $1,180 each. Flotation costs would amount to $25 per bond. Use the estimation formula to ngure the approximate after-tao cost of deot inancing? e. What is the WACC? a. the market price o the common stock is $44 and dridends are expected to grow a a rate o 8% per year for he foreseeable ture, he company's cost o retained earnings nancing is %. Round to two decimal places Enter your answer in the answer box and then click Check Answer Clear All Check Answer 1:43 PM O Type here to search ^ , dx 12/7/2017

Explanation / Answer

a) Cost of retained earnings, ke = D0 x (1 + g) / P + g = 1.16 x (1 + 8%) / 44 + 8% = 10.85%

b) Cost of new equity, kne = D0 x (1 + g) / (P - F) + g = 1.16 x 1.08 / (44 - 6) + 8% = 11.30%

c) Cost of preferred stock, kps = D / (P - F) = 2.44 / (27 - 6) = 11.62%

d) Cost of debt = (C + (F - P) / n) / (F + P)/2 = (100 + (1000 - (1180 - 25))/ 6) / (1000 + (1180 - 25)) / 2 = 6.88%

e) WACC = wd x kd x (1 - tax) + wps x kps + we x ke

= 30% x 6.88% x (1 - 35%) + 15% x 11.62% + 55% x 11.30%

= 9.30%

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