Question 9.8: Suppose a $31 stock were being issued; flotation costs, as a...

Financial Analysis and Decision Making: Tools and Techniques to Solve Financial Problems and Make Effective Business Decisions

Suppose a $31 stock were being issued; flotation costs, as a percent of stock price were 9.6%; the cost of retained earnings under the CAPM and bond yield methods were 14.1% and 16%, respectively. What would the cost of newly issued common stock be for each method?

The "Step-by-Step Explanation" refers to a detailed and sequential breakdown of the solution or reasoning behind the answer. This comprehensive explanation walks through each step of the answer, offering you clarity and understanding.
Our explanations are based on the best information we have, but they may not always be right or fit every situation.

The blue check mark means that this solution has been answered and checked by an expert. This guarantees that the final answer is accurate.
Learn more on how we answer questions.

This Question has been Answered.

Already have an account?

Related Answered Questions

Question: 9.11

Micron’s board of directors wants to raise $2,000,000 of capital this year. Retained earnings are only $100,000. Interest is 12%, their tax rate is 40%, and they have decided not to issue any preferred stock. Their optimum capital structure for new capital is 80% debt, of which 5% will be raised by ...

Verified Answer:

To solve this problem, we must determine how much ...

Question: 9.1

Given the interest rate on new debt for a particular company is 13%, and the company’s tax rate is 30%, what is its after-tax cost of debt? ...

Verified Answer:

Kd =13 \% \times(1-30 \%)=13 \% \times 70 \...

Question: 9.3

The annual dividend on a $1,000 share of preferred stock is $70. Flotation costs are $66 per share. What is the cost of preferred stock capital? ...

Verified Answer:

Kps =\cfrac{\$ 70}{(\$ 1,000-\$ 66)}=\cfrac...

Question: 9.4

Alpha Company’s last dividend was $0.90, its growth rate is 12% per year, and its current price is $31. What is its yield? ...

Verified Answer:

\begin{aligned}Ks & =\cfrac{\$ 0.90 \ti...

Question: 9.5

The risk-free rate of return, Krf, is 5.5%; the market yield, Km, is 15%; and the beta, B, for Alpha Company is 0.9. What is the cost of common equity using CAPM for the stock in question? ...

Verified Answer:

\begin{aligned}Ks & =5.5 \%+(15 \%-5.5 ...

Question: 9.6

Alpha Company’s bonds yield 12%. Alpha Company is fairly typical of companies in its industry, and the judgment risk premium is set at 4%. What is its cost of common equity capital? ...

Verified Answer:

Ks =12 \%+4 \%=16 \%

Question: 9.7

Suppose a stock has a dividend of $0.90 per share, a growth rate of 12%, a current price of $31, and flotation costs of $3 per share. What would be the cost of this capital using the dividend yield model? ...

Verified Answer:

Ke =\cfrac{\$ .90 \times(1+12 \%)}{\$ 31-\$...

Question: 9.9

Micron’s capital structure consists of: (1) 15% accounts payable and other non-interest-bearing debt, (2) 45% bank debt on which they pay 10% interest, (3) 5% preferred stock, (4) 15% retained earnings, and (5) 20% stock at par plus additional paid in capital. They are in the 30% tax bracket. They ...

Verified Answer:

\begin{aligned}\text { WAAC }=15 \% \times ...

Question: 9.12

Figure 9–5 provides an analysis of the marginal cost of capital and investment opportunities schedule for Merchantville Electric Motors Manufacturing. What is their optimal capital budget? ...

Verified Answer:

Project B, which requires $500,000 and has an inte...