question archive Q1) Expected cash dividends are $2
Q1) Expected cash dividends are $2
Subject:AccountingPrice:3.87 Bought7
Q1)
Expected cash dividends are $2.00, the dividend yield is 8%, flotation costs are 6% of price, and the growth rate is 2%. Compute the approximate cost of new common stock. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Q2
The coupon rate on a debt issue is 9%. If the yield to maturity on the debt is 9%, what is the after-tax cost of debt in the weighted average cost of capital if the firm's tax rate is 35%? (Round your answer to 2 decimal places.)
Q3
A firm's stock is selling for $85. The next annual dividend is expected to be $4.00. The growth rate is 7%. The flotation cost is $7. What is the cost of retained earnings? (Round your answer to 2 decimal places.)
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Answer:
1]
stock price = expected dividend / dividend yield = $2 / 8% = $25
net proceeds per share = stock price * (1 - flotation cost) = $25 * (1 - 6%) = $23.50
cost of new common stock = (expected dividend / net proceeds per share) + growth rate
cost of new common stock = ($2 / $23.50) + 2%
cost of new common stock = 10.51%
2]
after tax cost of debt = YTM * (1 - tax rate) = 9% * (1 - 35%) = 5.85%
3]
cost of RE = (next year dividend / stock price) + growth rate
cost of RE = ($4 / $85) + 7%
cost of RE = 11.71%
