P9–17 Calculation of individual costs and WACC Dillon Labs has asked its financial managerto measure the cost of each specific type of capital as well as the weighted averagecost of capital. The weighted average cost is to be measured by using the followingweights: 40% long-term debt, 10% preferred stock, and 50% common stock equity(retained earnings, new common stock, or both). The firm’s tax rate is 40%.Debt The firm can sell for $980 a 10-year, $1,000-par-value bond paying annualinterest at a 10% coupon rate. A flotation cost of 3% of the par value is requiredin addition to the discount of $20 per bond.Preferred stock Eight percent (annual dividend) preferred stock having a parvalue of $100 can be sold for $65. An additional fee of $2 per share must be paidto the underwriters.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. Itsdividend payments, which have been approximately 60% of earnings per share ineach of the past 5 years, were as shown in the following table.YearDividend20153.7520143.520133.320123.1520112.85It 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. Dividendpayments are expected to continue at 60% of earnings. (Assume that rr = rs.)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 WACC for Dillon Labs.