Calculating the WACC Here is the condensed 2011 balance sheet

Calculating the WACC Here is the condensed 2011 balance sheet for Skye Computer Company (in thousands of dollars).Current Assets $2,000Net Fixed Assets $3,000Total Assets: $5,000Current Liabilities $900Long-Term Debt $1,200Preferred Stock (10,000 shares) 250Common Stock (50,000 shares) 1300Retained Earnings $1,350Total Common Equity $2,650Total Liabilities and Equity $5,000Skye’s earnings per share last year were $3.20. The common stock sells for $55.00, last year’s dividend (D0) was $2.10, and a floatation cost of 10% would be required to sell new common stock. Security Analysts are projecting that the common dividend will grow at an annual rate of 9%. Skye’s preferred stock pays a dividend of $3.30 per share, and its preferred stock sells for $30.00 per share. The firm can issue long term debt at an interest rate (or before-tax cost) of 10%, and its marginal tax rate is 35%. The firm’s currently outstanding 10% annual coupon rate long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Skye’s beta is 1.516. In its cost of capital calculations, the company considers only long-term capital; hence, it disgregards current liabilities for calculating its WACC.a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity.b. Now calculate the cost of common equity from retained earnings using the CAPM method.c. What is the cost of new common stock based on CAPM? (HInt: Find the difference between re nd rs as determined by the DCF method and add the difference to the CAPM value for rs)d. If Skye continues to use the same market value capital structure, what is the firm’s WACC assuming that (1) it uses only retained earnings for equity? (2) If it expands so rapidly that it must issue new common stock?(SHOW WORK)

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