Question

Please use the following information to answer questions 1-6: Company XYZ will pay in exactly one year $4 in dividends per share to its common stock shareholders. In exactly one year it will pay $2 in dividends per share to holders of its preferred stock. The flotation costs on a per share basis for common stock are $7 and for prefered stock are $2. Common stock dividends are expected to grow 5 % each year-preferred stock dividends will not change. The company can issue $1,000-par-value, 12 % coupon, ten-year bonds that can be sold for $950 each. Flotation costs for each bond equal $30. The current per share prices for common stock and preferred stock are $19 and $11, respectively. The company's tax rate is 40 %. The company's target capital structure is 70% retained earnings, 20 % new preferred stock issues, and 10% new debt (bonds). What is r, (new common stock issue)? Select one: a. 20.89% b. 25.45% C. 30.25% O d. 38.33% e. None of the above hp

Answer 1

Formula Bar After tax cost of Debt 1 Cost of new common equity 2 3 Expected Dividend (D1) 4 Constant Growth rate (8) 5 Stock Price (PO) 6 Flotation costs (F) 7 8 Cost of New Common Stock Issue (Ke) (Option d) 9 [D1 / (PO-F*PO) ] +g 10 11 Cost of Retained Earnings $4.00<-- 4 5% <-- 0.05 $19.00 <-- 19 $7.00 <-- 7 Annual interest (PMT) market price of bond (PV) No. of years (nper) Redeemable value (FV) Flotation costs (F) Net Receivable value (NRV) $120.00 <-- =1000*12% $950.00 <-- 950 10 <-- 10 $1,000.00 <-- 1000 $30.00 $920.00 <-- =E4-E7 38.33% <-- =(B3/($B5-B6))+B4 Pretax cost of debt (Option e) Tax rate 13.50% <-- =RATE(E5, E3,-E8, E6) 40% <-- 0.4 12 $4.00 <-- 4 5% <-- 0.05 $19.00 <-- 19 8.10% <-- =$E$11"(1-$E$12) After tax cost of debt (Kd) (option a) (Pre tax cost * (1 - Tax rate) 13 Expected Dividend (D1) 14 Constant Growth rate (g) 15 Stock Price (PO) 16 17 18 Cost of New Common Stock Issue (Ke) (Option a) 19 (D1 / PO)] +g 20 26.05%]<- =(B13/B15)+B14