P9–19 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 40% tax bracket. Debt The firm can raise debt by selling $1,000-par-value, 8% coupon interest
rate, 20-year bonds on which annual interest payments will be made. To sell the
issue, an average discount of $30 per bond would have to be given. The firm also
must pay flotation costs of $30 per bond.
Preferred stock The firm can sell 8% preferred stock at its $95-per-share par
value. The cost of issuing and selling the preferred stock is expected to be $5 per
share. Preferred stock can be sold under these terms.
Common stock The firm’s common stock is currently selling for $90 per share. The
firm expects to pay cash dividends of $7 per share next year. The firm’s dividends
have been growing at an annual rate of 6%, and this growth is expected to continue
into the future. The stock must be underpriced by $7 per share, and flotation costs
are expected to amount to $5 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 $100,000 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.
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 firm’s weighted average cost of capital using the capital structure
weights shown in the following table. (Round answer to the nearest 0.1%.)
Source of capital Weight
Long-term debt 30%
Preferred stock 20
Common stock equity 50
Total 100%

P9–16 Cost of capital Edna Recording Studios, Inc., reported earnings available to common stock of $4,200,000 last year. From those earnings, the company paid a dividend of $1.26 on each of its 1,000,000 common shares outstanding. The capital
structure of the company includes 40% debt, 10% preferred stock, and 50% com-
mon stock. It is taxed at a rate of 40%.

a. If the market price of the common stock is $40 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
$7.00 per share, what is the company’s cost of new common stock financing?
c. The company can issue $2.00 dividend preferred stock for a market price of
$25.00 per share. Flotation costs would amount to $3.00 per share. What is the
cost of preferred stock financing?
d. The company can issue $1,000-par-value, 10% coupon, 5-year bonds that can be
sold for $1,200 each. Flotation costs would amount to $25.00 per bond. Use the
estimation formula to figure the approximate cost of debt financing.
e. What is the WACC?