Question

11.    A firm's preferred stock pays an annual dividend of $2, and the stock sells for $65. Flotation costs for new issuances of preferred stock are 5% of the stock value. What is the after-tax cost of preferred stock if the firm's tax rate is 30%?

12.    A firm's stock is selling for $62. The next annual dividend is expected to be $3.00. The growth rate is 9%. The flotation cost is $5.00. What is the cost of retained earnings?

13.    A firm's stock is selling for $65. The dividend yield is 6%. A 7% growth rate is expected for the common stock. The firm's tax rate is 40%. What is the firm's cost of retained earnings?

14.    Although debt financing is usually the cheapest component of capital, it cannot be used in excess because
A. interest rates may change.
B. the firm's stock price will increase and raise the cost of equity financing.
C. the financial risk of the firm may increase and thus drive up the cost of all sources of financing.
D. underwriting costs may change.

15.    Oak Enterprises has a beta of 1.5, the market return is 8%, and the T-bill rate is 4%. What is their expected required return of common equity?

Answer 1

Sol:

Calculations: