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1.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, 9?% coupon interest? rate, 18?-year bonds on which annual interest payments will be made. To sell the? issue, an average discount of?$20 per bond would have to be given. The firm also must pay flotation costs of ?$20 per bond.
Preferred stock The firm can sell 8?% preferred stock at its?$95?-per-share par value. The cost of issuing and selling the preferred stock is expected to be ?$4 per share. Preferred stock can be sold under these terms
Common stock The? firm's common stock is currently selling for?$85 per share. The firm expects to pay cash dividends of ?$7.5 per share next year. The? firm's dividends have been growing at an annual rate of 6?%,and this growth is expected to continue into the future. To sell new shares of common? stock, the firm must underprice the stock by ?$5 per? share, and flotation costs are expected to amount to $6 per share. The firm can sell new common stock under these terms.
Retained earnings When measuring this? cost, the firm does not concern itself with the tax bracket or brokerage fees of owners. It expects to have available ?$140,000 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 stock equity 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 structure weights shown in the following? table,(Round answer to the nearest? 0.01%)
THE TABLE :
Long-term_debt 30%
Preferred_stock 15%
Common_stock_equity 55%
Total 100%
a. The? after-tax cost of debt using the approximation formula is
?(Round to two decimal? places.)
The? after-tax cost of debt using the? bond's yield to maturity?(YTM) is
?(Round to two decimal? places.)
b. The cost of preferred stock is
.
?(Round to two decimal? places.)
c. The cost of retained earnings is
?(Round to two decimal? places.)
The cost of new common stock is
?(Round to two decimal? places.)
d. Using the cost of retained? earnings, the? firm's WACC is
?(Round to two decimal? places.)
Using the cost of new common? stock, the? firm's WACC is
?(Round to two decimal? places.)
2. At a 10% per year interest rate, $500 now is equivalent to how much three years hence? 1. Fill the blank. a. P=( ) b. n=( ) c. i= ( ) 2. What is the equivalent value of (F/P, 10%, 3) factor? a. 1.3439 b. 0.7441 c. 1.3310 d. 0.7513 3. What is the F value? a. 732.05 b. 665.50 c. 500.75 d. 375.65
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