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X P9-17 (similar to) Question Help Calculation of individual costs and WACC Dillon Labs has asked its financial manager to me

a.  The​ after-tax cost of debt using the​ bond's yield to maturity​ (YTM) is

The​ after-tax cost of debt using the approximation formula is

b.  The cost of preferred stock is

c.  The cost of retained earnings is

The cost of new common stock is

d.  Using the cost of retained​ earnings, the​ firm's WACC is

Using the cost of new common​ stock, the​ firm's WACC is

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Answer #1

The​ after-tax cost of debt using the approximation formula is:-

=(70+((1000-994.25)/12))/((1000+994.25)/2)*(1-25%) =5.30%

Cost of retained earnings approach:-

Weight Cost Debt 50.00% 5.30% Preferr 20.00% 9.68% Equity 30.00% 11.58% WACC Weight*cost 2.65% 1.94% 3.48% 8.06%

Debt Preferred Equity Weight Cost Weight*cost 0.5 =RATE(12,7%*1000,-1025*97%, 1000)*(1-25%) =E4*D4 0.2 =(9%*100)/(98-5) =E5*D

Cost of equity approach:-

Debt Preferred Equity Weight Cost 50.00% 5.30% 20.00% 9.68% 30.00% 12.08% WACC Weight*cost 2.65% 1.94% 3.62% 8.21%Debt Preferred Equity Weight 0.5 0.2 0.3 Cost =RATE(12,7%*1000,-1025*97%, 1000)*(1-25%) =(9%*100)/(98-5) =(3.42*(1+5.5115%)/(

The growth rate of dividend is calculated using the RATE function as follows:-

=RATE(nper,pmt,pv,fv)

=RATE(10,,-2,3.42)

=5.115%

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