Edna Recording Studios, Inc., reported earnings available to common stock of $4,200,000last year. From those earnings, the company paid a dividend of $1.28 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 30% debt, 15% preferred stock, and 55% common stock. It is taxed at a rate of 21%. a. If the market price of the common stock is $46 and dividends are expected to grow at a rate of 6% 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 $7 per share, what is the company's cost of new common stock financing? c. The company can issue $2.01 dividend preferred stock for a market price of $34 per share. Flotation costs would amount to $4 per share. What is the cost of preferred stock financing? d. The company can issue $1,000-par-value, 8% annual coupon, 5-year bonds that can be sold for $1,290 each. Flotation costs would amount to $20 per bond. What is the after-tax cost of debt financing? e. What is the WACC?
Edna Recording Studios, Inc., reported earnings available to common stock of $4,200,000last year. From those earnings, the company paid a dividend of $1.28 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 30% debt, 15% preferred stock, and 55% common stock. It is taxed at a rate of 21%. a. If the market price of the common stock is $46 and dividends are expected to grow at a rate of 6% 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 $7 per share, what is the company's cost of new common stock financing? c. The company can issue $2.01 dividend preferred stock for a market price of $34 per share. Flotation costs would amount to $4 per share. What is the cost of preferred stock financing? d. The company can issue $1,000-par-value, 8% annual coupon, 5-year bonds that can be sold for $1,290 each. Flotation costs would amount to $20 per bond. What is the after-tax cost of debt financing? e. What is the WACC?
Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Chapter15: Financial Statement Analysis
Section: Chapter Questions
Problem 52E: Juroe Company provided the following income statement for last year: Juroes balance sheet as of...
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Edna Recording Studios, Inc., reported earnings available to common stock of $4,200,000last year. From those earnings, the company paid a dividend of $1.28 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 30% debt, 15% preferred stock, and 55% common stock. It is taxed at a rate of 21%.
a. If the market price of the common stock is $46 and dividends are expected to grow at a rate of 6% 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 $7 per share, what is the company's cost of new common stock financing?
c. The company can issue $2.01 dividend preferred stock for a market price of $34 per share. Flotation costs would amount to $4 per share. What is the cost of preferred stock financing?
d. The company can issue $1,000-par-value, 8% annual coupon, 5-year bonds that can be sold for $1,290 each. Flotation costs would amount to $20 per bond. What is the after-tax cost of debt financing?
e. What is the WACC?
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