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Edna Recording Studios,...
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chegg.com
yajnapid answered this
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Solution:
a
Cost of Retained Earnings(Ke) = [Dividend (1+growth)/Market price] +
growth Cost of Retained Earnings
=[126 (1+0.06)/40]+
0.06
=0.09339
=9.339%
=9.34%
b.
Company Cost of New Common Stock
(Ks)=[Dividend (1+growth)/(Market price - floatation costs ]
+ growth Rate
=[1.26 (1+0.06)/(40-7)]+0.06
=0.10047
=10.047%
=10%
Cost of Preferred Stock
Kp=Prefered Dividend/(market price -
Flotation cost)
=2/(25-3)
=0.090909
=9.09%
cost of debt financing
Kd= [(Coupon +(FV-RV)/T)/(FV+RV)/2] x
[1 - 0.40]
=[(100+(1000-1175)/5)/(1000+1175)/2] x
[1-0.40]
=[65/1087.5] x 0.60
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