Calculation Individual Costs Wacc Dillon Labs Asked Financial Manager Measure Cost Specifi Q28401821

Calculation of individual costs and WACC-Dillon Labs has asked its financial manager to measure the cost ofeach specific type of capital as well as the weighted average costof capital. The weighted average cost is to be measured by usingthe following? weights: 45% long-term debt, 25% preferred stock,and 30% common stock equity (retained earnings, new common stock,or both) The firm’s tax rate is 35%

Debt- The firm can sell for $980 a 12-year,$1,000-par-value bond paying annual interest at 6.00% coupon rate.A flotation cost of 4% of the par value is required in addition tothe discount of $20 per bond.

Preferred stock- 9.50% (annual dividend)preferred stock having a par value of $100 can be sold for $80. Anadditional fee of 5$ per share must be paid to theunderwriters.

Common stock- The firm’s common stock iscurrently selling for $60 per share. The dividend expected to bepaid at the end of the coming year (2016) is $2.55. Its dividendpayments, which have been approximately 70% of earnings per sharein the past 5 years, were as shown in the following table:

Year                     Dividend

2015                      $2.43

2014                      $2.32

2013                      $2.21

2012                      $2.10

2011                      $2.00

It is expected that to attract buyers, new common stock must beunderpriced $6 per share, and the firm must also pay $2.00 pershare in flotation costs. Dividend payments are expected tocontinue at 70% of earnings. (Assume that t r Subscript r = rSubscript s?.)

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 WACC for Dillon Labs.