Question: Calculation of individual costs and WACC
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 30% tax bracket.
Debt The firm can raise debt by selling $1,000-par-value, 9% coupon interestrate,
10-year bonds on which annual interest payments will be made. To sell theissue, an average discount of $25
Per bond would have to be given. The firm also must pay flotation costs of $35 per bond.
Preferred stock the firm can sell 6% preferred stock at its $90-per-share
Par value. The cost of issuing and selling the preferred stock is expected to be $7 per share. Preferred stock can be sold under these terms.
Common stock thefirm’s common stock is currently selling for
$60 per share. The firm expects to pay cash dividends of $5
Per share next year. Thefirm’s dividends have been growing at an annual rate of 68%,
And this growth is expected to continue into the future. To sell new shares of commonstock, the firm must underprice the stock by
$7 pershare, and flotation costs are expected to amount to $3
Per share. The firm can sell new common stock under these terms.
Retained earnings when measuring thiscost, 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 comingyear; once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing.
**Round to two decimal places
a. Calculate theafter-tax cost of debt.
b. Calculate the cost of preferred stock.
c. Calculate the cost of retained earnings is
- Calculate the cost of new common stock.
d. Calculate thefirm’s weighted average cost of capital using the capital structure weights shown in the followingtable,
Long-term debt 35%
Preferred stock 25%
Common_stock_equity 40%
Total 100%
** (Round answer to the nearest0.01%)
- Using the cost of retainedearnings, thefirm’s WACC is
- Using the cost of new commonstock, thefirm’s WACC
