Cost of capital   Edna Recording Studios, Inc., reported earnings available to common stock of
$5 comma 000 comma 0005,000,000
last year. From those earnings, the company paid a dividend of
$1.171.17
on each of its
1 comma 000 comma 0001,000,000
common shares outstanding. The capital structure of the company includes
3030%
debt,
2525%
preferred stock, and
4545%
common stock. It is taxed at a rate of
2121%.
a.  If the market price of the common stock is
$3131
and dividends are expected to grow at a rate of
88%
per year for the foreseeable future, what is the company's cost of retained earnings
financing?
b.  If underpricing and flotation costs on new shares of common stock amount to
$77
per share, what is the company's cost of new common stock
financing?
c.  The company can issue
$2.222.22
dividend preferred stock for a market price of
$2828
per share. Flotation costs would amount to
$55
per share. What is the cost of preferred stock
financing?
d.  The company can issue
$1 comma 0001,000-par-value,
66%
annual coupon,
1111-year
bonds that can be sold for
$1 comma 1601,160
each. Flotation costs would amount to
$2020
per bond. What is the after-tax cost of debt financing?
e.  What is the
WACC?
Question content area bottom
Part 1
a.  If the market price of the common stock is
$3131
and dividends are expected to grow at a rate of
88%
per year for the foreseeable future, the company's cost of retained earnings financing is
12.0812.08%.
(Round to two decimal places.)
Part 2
b.  If
underpricing
and flotation costs on new shares of common stock amount to
$77
per share, the company's cost of new common stock financing is
13.2713.27%.
(Round to two decimal places.)
Part 3
c.  If the company can issue
$2.222.22
dividend preferred stock for a market price of
$2828
per share, and flotation costs would amount to
$55
per share, the cost of preferred stock financing is
9.659.65%.
(Round to two decimal places.)
Part 4
d.  If the company can issue
$1 comma 0001,000-par-value,
66%
coupon,
1111-year
bonds that can be sold for
$1 comma 1601,160
each, and flotation costs would amount to
$2020
per bond, the after-tax cost of debt financing is
enter your response here%.
(Round to two