Acme Corporation is selling $25 million of cumulative, non-participating preferred stock. The issue will have a par value of $65 per share with a dividend rate of 6%.The issue will be sold to investors for $68 per share, and issuance costs will be $4 per share The cost of preferred stock to Acme is
Answer(s): D
The company will receive the use of on $64 per share. The annual dividend requirement is 6% of $65, or $390 per share. Dividing the $3.90 by the $64 received results in a financing cost of 6.09%.
By using the dividend growth model, estimate the cost of equity capital for a firm with a stock price of $30 00, an estimated dividend at the end of the first year of $300 per share, and an expected growth rate of 10%.
Under the dividend growth model, the cost of equity equals the expected growth rate plus the quotient of the next dividend and the current market price. Thus the cost of equity capital is 20% [10% + ($3 + 11$30)].This model assumes that the payout ratio, retention rate, and the earnings per share growth rate are all constant.
A firm's target or optimal capital structure is consistent with which one of the following?
Ideally a firm will have a capital structure that minimizes its weighted-average cost of capital This requires a balancing of both debt and equity capital and their associated risk levels.
The DCL Corporation is preparing to evaluate the capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods of analyses. the cost of capital for the firm must be estimated. The following information for DCL Corporation is provided.· Market price of common stock is $50 per share. · The dividend next year is expected to be $2.50 per share. · Expected growth in dividends is a constant 10%. · New bonds can be issued at face value with a 13% coupon rate. · The current capital structure of 40% long-term debt and 60% equity is considered to be optimal· Anticipated earnings to be retained in the coming year are $3 million.· The firm has a 40% marginal tax rate.If the firm must assume a 10% flotation cost on new stock issuances. what is the cost of new common stock?
Answer(s): B
The formula to determine the cost of retained earnings, with the additional flotation cost entered into the calculation, is Cost of new common stock = {D, + [P x (1 -- Flotation cost)]} + GWhere: Di = next dividendPo = current priceG = growth rate in dividends per share (but the model assumes that the dividend-payout ratio, retention rate, and therefore the EPS growth rate are constant). This yields a cost of new common stock of 15.56%. Cost of new common stock = {$2.50 ` [$50.00 x (1.0-- 0..1)] + 01= ($2.50 + $45.00) + 01= 0.0556 + 0.1= 0.1556
When calculating a firm's cost of capital, all of the following are true except that
The cost of capital of a firm is the current, weighted average, after-tax cost of the firm's various financing components Historical costs are irrelevant.
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