Calculation of individual costs and WACC Lang Enterprises is intarested in measu

Question

Calculation of individual costs and WACC Lang Enterprises is intarested in measuring its overall cost of cap al Current estgation has gathered the t Debt The fim can raise delbk by slling $S1,000 par value, as, coupon interest rate. 19 year bonds on which anuel interest paymens wil be 1 ng gata The firms in the 35% tax bracket must pay flotation costs of $25 per bond made. To sell the issue, an average discount of $20 per bond would have to be given. The firm also 95-per-share par value The cost of issuing and selling the preferred stock is expected to be $6 per share. Preferred stock can be sold under these terms mexpect stop a cash di dend ors sper share ne year Thefir s dividend expected to continue into the future. To sell new shares of common stock, the firm must underprice the terms havebee growing at an annual rate of 6% and this grow is stock by $6 per share, and flotation costs are expected to amount to S7 per share. The fim or brokerage fees can sell new common stock under these Retained earnings When measuring this cost, the firm does not concern itself with the tax bracket exhausted, the firm will use ne common stock as the form of common stock of owners It expects to have available $100.000 of retained earnings in the coming year, once these retained eamings are

Explanation / Answer

1-

cost of debt

interest+(face value-net proceeds)/years to maturity / (face value+net proceeds)/2

80+(1000-955)/19 / (1000+955)/2

82.368/977.5

8.43%

after tax cost of debt

8.43*(1-.35)

5.4795

2- cost of preferred stock

preferred dividend/market price per share

(95*6.5%)/(95-6)

6.94%

3-

cost of retained earning

(expected dividend/market price)+growth

(5.5/50)+.06

17.00%

cost of new common equity

(expected dividend/market price)+growth

(5.5/37)+.06

20.86%

4-

WACC using retained earning rate

source of capital

weight

cost of capital

weight*cost

debt

0.25

5.4795

1.369875

preferred

0.25

6.94

1.735

equity

0.5

17

8.5

weighted average cost of capital using cost of retained earning

11.60488

WACC using retained earning rate

source of capital

weight

cost of capital

weight*cost

debt

0.25

5.4795

1.369875

preferred

0.25

6.94

1.735

equity

0.5

20.86

10.43

weighted average cost of capital using cost of NEW ISSUED EQUITY

13.53488

1-

cost of debt

interest+(face value-net proceeds)/years to maturity / (face value+net proceeds)/2

80+(1000-955)/19 / (1000+955)/2

82.368/977.5

8.43%

after tax cost of debt

8.43*(1-.35)

5.4795

2- cost of preferred stock

preferred dividend/market price per share

(95*6.5%)/(95-6)

6.94%

3-

cost of retained earning

(expected dividend/market price)+growth

(5.5/50)+.06

17.00%

cost of new common equity

(expected dividend/market price)+growth

(5.5/37)+.06

20.86%

4-

WACC using retained earning rate

source of capital

weight

cost of capital

weight*cost

debt

0.25

5.4795

1.369875

preferred

0.25

6.94

1.735

equity

0.5

17

8.5

weighted average cost of capital using cost of retained earning

11.60488

WACC using retained earning rate

source of capital

weight

cost of capital

weight*cost

debt

0.25

5.4795

1.369875

preferred

0.25

6.94

1.735

equity

0.5

20.86

10.43

weighted average cost of capital using cost of NEW ISSUED EQUITY

13.53488

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