Question

1. Tapley has a stock price of $88/share, a current dividend of $4/share, and a growth rate of 10%. Additionally, the flotation expenses it faces in the external markets will be tiered based on the volume of stock it sells and they range from a low of 10% to a middle cost of 15% to a high cost of 20%.

a) Cost of Equity for Retained Earnings (Show your Work):

b) Cost of Equity with a 10% flotation expense (Show your Work):

c) Cost of Equity with a 15% flotation expense (Show your Work):

d) Cost of Equity with a 20% flotation expense (Show your Work):

With all of the data above, please calculate (Show your Work):

WACC₁ =

WACC₂ =

WACC₃ =

WACC₄ =

WACC₅ =

WACC₆ =

Answer 1

Cost of Equity = 15%; Cost of Equity = 15.56%; Cost of Equity = 15.88% Cost of Equity = 16.25%

Cost of Equity capital = {(D1/Net Proceeds) +g}

Do	$         4
Po	$       88
g (in %)	10%
D1 = Do(1+g)	$      4.4
	Present (a)	10% (b)	15% (c)	20% (d)
Flotation Cost (Po * Flotation cost in %	0	$    8.80	$ 13.20	$ 17.60
Net Proceed (Po - Flotation Cost)	$ 88.00	$ 79.20	$ 74.80	$ 70.40
D1	$    4.40	$    4.40	$    4.40	$    4.40
Growth Rate (g)	10%	10%	10%	10%
Cost of Equity {(D1/Net Proceeds) +g}	15.00%	15.56%	15.88%	16.25%