Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as… Show more Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 10% preferred stock, and 50% common stock equity (retained earning, new common stock, or both). The firm’s tax rate is 40%. Debt Debt Debt The firm can sell for $980 a 10-year, $1000 par-value bond paying annual interest at a 10% coupon rate. A flotation cost of 3% of the par value is required in addition to the discount of $20 per bond. Preferred stock Preferred stock Preferred stock Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters. Common Stock Common Stock Common Stock The firm’s common stock is currently selling for $50 per share. The dividend expected to be paid at the end of the coming year (2016) is $4. Its dividend payments, which have been approximately 60% of earnings per share in each of the past 5 years, were as shown in the following table. Year Dividend Dividend 2015 $3.75 $3.75 2014 $3.50 $3.50 2013 $3.30 $3.30 2012 $3.15 $3.15 2011 $2.85 $2.85 It is expected that to attract buyers, new common stock must be underpriced $5 per share, and the firm must also pay $3 per share in flotation costs. Dividend payments are expected to continue at 60% of earnings. (Assume that rr = rs.) a. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Finding the YTM on a Bond Finding the YTM on a Bond Finding the YTM on a Bond Finding the YTM on a Bond Finding the YTM on a Bond Finding the YTM on a Bond Finding the YTM on a Bond Net proceeds from sale of bond Net proceeds from sale of bond Net proceeds from sale of bond Net proceeds from sale of bond Net proceeds from sale of bond $ $ Coupon payment Coupon payment Coupon payment Coupon payment Coupon payment $ $ Years to maturity Years to maturity Years to maturity Years to maturity Years to maturity Par value (principal) Par value (principal) Par value (principal) Par value (principal) Par value (principal) $ $ Before-tax cost of debt Before-tax cost of debt Before-tax cost of debt Before-tax cost of debt Before-tax cost of debt % % After-tax cost of debt After-tax cost of debt After-tax cost of debt After-tax cost of debt After-tax cost of debt % % b. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Cost of Preferred Stock Cost of Preferred Stock Cost of Preferred Stock Cost of Preferred Stock Cost of Preferred Stock Annual dividend Annual dividend Annual dividend $ $ Net proceeds Net proceeds Net proceeds $ $ Cost Cost Cost % % c. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS Annual growth rate Annual growth rate Annual growth rate Annual growth rate Annual growth rate % % Year Year Cash Flow Cash Flow Next year dividend Next year dividend Next year dividend Next year dividend Next year dividend $ $ 2008 2008 $2.85 $2.85 Current price Current price Current price Current price Current price $ $ 2012 2012 $3.75 $3.75 Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock % % Annual Growth Rate Annual Growth Rate 7.10% 7.10% d. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock % % Weight of common stock Weight of common stock Weight of common stock Weight of common stock Weight of common stock Weight of common stock Weight of common stock % % Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings % % Cost of preferred stock Cost of preferred stock Cost of preferred stock Cost of preferred stock Cost of preferred stock Cost of preferred stock Cost of preferred stock % % Weight of preferred stock Weight of preferred stock Weight of preferred stock Weight of preferred stock Weight of preferred stock Weight of preferred stock Weight of preferred stock 1.00% 1.00% Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock 1.000% 1.000% Before tax cost of debt Before tax cost of debt Before tax cost of debt Before tax cost of debt Before tax cost of debt Before tax cost of debt Before tax cost of debt % % After-tax cost of debt – 25% After-tax cost of debt – 25% After-tax cost of debt – 25% After-tax cost of debt – 25% After-tax cost of debt – 25% After-tax cost of debt – 25% After-tax cost of debt – 25% % % Weight of debt Weight of debt Weight of debt Weight of debt Weight of debt Weight of debt Weight of debt % % Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt % % Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings % % Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock % % Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt % % % % The firm’s common stock is currently selling for $50 per share. The dividend expected to be paid at the end of the coming year (2016) is $4. Its dividend payments, which have been approximately 60% of earnings per share in each of the past 5 years, were as shown in the following table. Year Dividend Dividend 2015 $3.75 $3.75 2014 $3.50 $3.50 2013 $3.30 $3.30 2012 $3.15 $3.15 2011 $2.85 $2.85 It is expected that to attract buyers, new common stock must be underpriced $5 per share, and the firm must also pay $3 per share in flotation costs. Dividend payments are expected to continue at 60% of earnings. (Assume that rr = rs.) a. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Finding the YTM on a Bond Finding the YTM on a Bond Finding the YTM on a Bond Finding the YTM on a Bond Finding the YTM on a Bond Finding the YTM on a Bond Finding the YTM on a Bond Net proceeds from sale of bond Net proceeds from sale of bond Net proceeds from sale of bond Net proceeds from sale of bond Net proceeds from sale of bond $ $ Coupon payment Coupon payment Coupon payment Coupon payment Coupon payment $ $ Years to maturity Years to maturity Years to maturity Years to maturity Years to maturity Par value (principal) Par value (principal) Par value (principal) Par value (principal) Par value (principal) $ $ Before-tax cost of debt Before-tax cost of debt Before-tax cost of debt Before-tax cost of debt Before-tax cost of debt % % After-tax cost of debt After-tax cost of debt After-tax cost of debt After-tax cost of debt After-tax cost of debt % % b. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Cost of Preferred Stock Cost of Preferred Stock Cost of Preferred Stock Cost of Preferred Stock Cost of Preferred Stock Annual dividend Annual dividend Annual dividend $ $ Net proceeds Net proceeds Net proceeds $ $ Cost Cost Cost % % c. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS Annual growth rate Annual growth rate Annual growth rate Annual growth rate Annual growth rate % % Year Year Cash Flow Cash Flow Next year dividend Next year dividend Next year dividend Next year dividend Next year dividend $ $ 2008 2008 $2.85 $2.85 Current price Current price Current price Current price Current price $ $ 2012 2012 $3.75 $3.75 Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock % % Annual Growth Rate Annual Growth Rate 7.10% 7.10% d. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock % % Weight of common stock Weight of common stock Weight of common stock Weight of common stock Weight of common stock Weight of common stock Weight of common stock % % Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings % % Cost of preferred stock Cost of preferred stock Cost of preferred stock Cost of preferred stock Cost of preferred stock Cost of preferred stock Cost of preferred stock % % Weight of preferred stock Weight of preferred stock Weight of preferred stock Weight of preferred stock Weight of preferred stock Weight of preferred stock Weight of preferred stock 1.00% 1.00% Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock 1.000% 1.000% Before tax cost of debt Before tax cost of debt Before tax cost of debt Before tax cost of debt Before tax cost of debt Before tax cost of debt Before tax cost of debt % % After-tax cost of debt – 25% After-tax cost of debt – 25% After-tax cost of debt – 25% After-tax cost of debt – 25% After-tax cost of debt – 25% After-tax cost of debt – 25% After-tax cost of debt – 25% % % Weight of debt Weight of debt Weight of debt Weight of debt Weight of debt Weight of debt Weight of debt % % Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt % % Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings % % Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock % % Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt % % % % The firm’s common stock is currently selling for $50 per share. The dividend expected to be paid at the end of the coming year (2016) is $4. Its dividend payments, which have been approximately 60% of earnings per share in each of the past 5 years, were as shown in the following table. Year Dividend Dividend 2015 $3.75 $3.75 2014 $3.50 $3.50 2013 $3.30 $3.30 2012 $3.15 $3.15 2011 $2.85 $2.85 It is expected that to attract buyers, new common stock must be underpriced $5 per share, and the firm must also pay $3 per share in flotation costs. Dividend payments are expected to continue at 60% of earnings. (Assume that rr = rs.) a. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Finding the YTM on a Bond Finding the YTM on a Bond Finding the YTM on a Bond Finding the YTM on a Bond Finding the YTM on a Bond Finding the YTM on a Bond Finding the YTM on a Bond Net proceeds from sale of bond Net proceeds from sale of bond Net proceeds from sale of bond Net proceeds from sale of bond Net proceeds from sale of bond $ $ Coupon payment Coupon payment Coupon payment Coupon payment Coupon payment $ $ Years to maturity Years to maturity Years to maturity Years to maturity Years to maturity Par value (principal) Par value (principal) Par value (principal) Par value (principal) Par value (principal) $ $ Before-tax cost of debt Before-tax cost of debt Before-tax cost of debt Before-tax cost of debt Before-tax cost of debt % % After-tax cost of debt After-tax cost of debt After-tax cost of debt After-tax cost of debt After-tax cost of debt % % b. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Cost of Preferred Stock Cost of Preferred Stock Cost of Preferred Stock Cost of Preferred Stock Cost of Preferred Stock Annual dividend Annual dividend Annual dividend $ $ Net proceeds Net proceeds Net proceeds $ $ Cost Cost Cost % % c. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS Annual growth rate Annual growth rate Annual growth rate Annual growth rate Annual growth rate % % Year Year Cash Flow Cash Flow Next year dividend Next year dividend Next year dividend Next year dividend Next year dividend $ $ 2008 2008 $2.85 $2.85 Current price Current price Current price Current price Current price $ $ 2012 2012 $3.75 $3.75 Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock % % Annual Growth Rate Annual Growth Rate 7.10% 7.10% d. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock % % Weight of common stock Weight of common stock Weight of common stock Weight of common stock Weight of common stock Weight of common stock Weight of common stock % % Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings % % Cost of preferred stock Cost of preferred stock Cost of preferred stock Cost of preferred stock Cost of preferred stock Cost of preferred stock Cost of preferred stock % % Weight of preferred stock Weight of preferred stock Weight of preferred stock Weight of preferred stock Weight of preferred stock Weight of preferred stock Weight of preferred stock 1.00% 1.00% Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock 1.000% 1.000% Before tax cost of debt Before tax cost of debt Before tax cost of debt Before tax cost of debt Before tax cost of debt Before tax cost of debt Before tax cost of debt % % After-tax cost of debt – 25% After-tax cost of debt – 25% After-tax cost of debt – 25% After-tax cost of debt – 25% After-tax cost of debt – 25% After-tax cost of debt – 25% After-tax cost of debt – 25% % % Weight of debt Weight of debt Weight of debt Weight of debt Weight of debt Weight of debt Weight of debt % % Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt % % Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted Average Cost of Capital Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings % % Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock Weighted cost of preferred stock % % Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt Weighted cost of debt % % % % The firm’s common stock is currently selling for $50 per share. The dividend expected to be paid at the end of the coming year (2016) is $4. Its dividend payments, which have been approximately 60% of earnings per share in each of the past 5 years, were as shown in the following table. Year Dividend Dividend 2015 $3.75 $3.75 2014 $3.50 $3.50 2013 $3.30 $3.30 2012 $3.15 $3.15 2011 $2.85 $2.85 It is expected that to attract buyers, new common stock must be underpriced $5 per share, and the firm must also pay $3 per share in flotation costs. Dividend payments are expected to continue at 60% of earnings. (Assume that rr = rs.) a. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Calculate the after-tax cost of debt. Finding the YTM on a Bond Finding the YTM on a Bond Finding the YTM on a Bond Finding the YTM on a Bond Finding the YTM on a Bond Finding the YTM on a Bond Finding the YTM on a Bond Net proceeds from sale of bond Net proceeds from sale of bond Net proceeds from sale of bond Net proceeds from sale of bond Net proceeds from sale of bond $ $ Coupon payment Coupon payment Coupon payment Coupon payment Coupon payment $ $ Years to maturity Years to maturity Years to maturity Years to maturity Years to maturity Par value (principal) Par value (principal) Par value (principal) Par value (principal) Par value (principal) $ $ Before-tax cost of debt Before-tax cost of debt Before-tax cost of debt Before-tax cost of debt Before-tax cost of debt % % After-tax cost of debt After-tax cost of debt After-tax cost of debt After-tax cost of debt After-tax cost of debt % % b. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Calculate the cost of preferred stock. Cost of Preferred Stock Cost of Preferred Stock Cost of Preferred Stock Cost of Preferred Stock Cost of Preferred Stock Annual dividend Annual dividend Annual dividend $ $ Net proceeds Net proceeds Net proceeds $ $ Cost Cost Cost % % c. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. Calculate the cost of common stock. INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model Cost of new common stock – Constant Growth Model INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS INTEREST OR GROWTH RATE – SERIES OF CASH FLOWS Annual growth rate Annual growth rate Annual growth rate Annual growth rate Annual growth rate % % Year Year Cash Flow Cash Flow Next year dividend Next year dividend Next year dividend Next year dividend Next year dividend $ $ 2008 2008 $2.85 $2.85 Current price Current price Current price Current price Current price $ $ 2012 2012 $3.75 $3.75 Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock % % Annual Growth Rate Annual Growth Rate 7.10% 7.10% d. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Calculate the WACC for Dillon Labs. Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock Cost of new common stock % % Weight of common stock Weight of common stock Weight of common stock Weight of common stock Weight of common stock Weight of common stock Weight of common stock % % Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings Weighted cost of retained earnings % % Cost of preferred stock Cost of preferred stock Cost of preferred sto