Calculation of individual costs and WACC Lang Enterprises is interested

jagguarpaw January 10, 2017 0 Comments

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 interest​rate,

10​-year bonds on which annual interest payments will be made. To sell the​issue, 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 the​firm’s common stock is currently selling for

$60 per share. The firm expects to pay cash dividends of $5

Per share next year. The​firm’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 common​stock, the firm must underprice the stock by

$7 per​share, 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 this​cost, the firm does not concern itself with the tax bracket or brokerage fees of owners. It expects to have available


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.

**Round to two decimal places

a. Calculate the​after-tax cost of debt.

b. Calculate the cost of preferred stock.

c. Calculate the cost of retained earnings is

  1. Calculate the cost of new common stock.

d. Calculate the​firm’s weighted average cost of capital using the capital structure weights shown in the following​table,

Long-term debt 35%

Preferred stock 25%

Common_stock_equity 40%

Total 100%

** (Round answer to the nearest​0.01%)

  1. Using the cost of retained​earnings, the​firm’s WACC is
  2. Using the cost of new common​stock, the​firm’s WACC