Question

Costly Corporation is considering using equity financing. Currently, the firm's stock is selling for $60.00 per...

Costly Corporation is considering using equity financing. Currently, the firm's stock is selling for $60.00 per share. The firm's dividend for next year is expected to be $5.30 with an annual growth rate of 6.0% thereafter indefinitely. If the firm issues new stock, the flotation costs would equal 15.0% of the stock's market value. The firm's marginal tax rate is 40%. What is the firm's cost of external equity?

Homework Answers

Answer #1
Cost of external equity ( r) D1÷[P0×(1-F)]+g
Here,
Stock price (P0) $                                60.00
Expected dividend (D1) $                                  5.30
Flotation cost (F) 15.00%
Growth rate (g) 6.00%
Cost of external equity ( r) 16.39%
5.3/(60×(1-15%))+6%
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Costly Corporation is considering using equity financing. Currently, the firm's stock is selling for $29.00 per...
Costly Corporation is considering using equity financing. Currently, the firm's stock is selling for $29.00 per share. The firm's dividend for next year is expected to be $5.30 with an annual growth rate of 5.0% thereafter indefinitely. If the firm issues new stock, the flotation costs would equal 15.0% of the stock's market value. The firm's marginal tax rate is 40%. What is the firm's cost of internal equity?
Costly Corporation is considering using equity financing. Currently, the firm's stock is selling for $38.00 per...
Costly Corporation is considering using equity financing. Currently, the firm's stock is selling for $38.00 per share. The firm's dividend for next year is expected to be $4.10 with an annual growth rate of 7.0% thereafter indefinitely. If the firm issues new stock, the flotation costs would equal 15.0% of the stock's market value. The firm's marginal tax rate is 40%. What is the firm's cost of external equity? 18.57% 17.79% 18.54% 20.58% 19.69% Marginal Incorporated (MI) has determined that...
Costly Corporation plans a new issue of bonds with a par value of $1000, a maturity...
Costly Corporation plans a new issue of bonds with a par value of $1000, a maturity of 37 years, and an annual coupon rate of 11.0%. Flotation costs associated with a new debt issue would equal 3.0% of the market value of the bonds. Currently, the appropriate discount rate for bonds of firms similar to Costly is 9.0%. The firm's marginal tax rate is 50%. What will the firm's true cost of debt be for this new bond issue? 11.34%...
Ross Textiles wishes to measure its cost of common stock equity. The​ firm's stock is currently...
Ross Textiles wishes to measure its cost of common stock equity. The​ firm's stock is currently selling for ​$38.08 The firm expects to pay a ​$3.29 dividend at the end of the year​ (2016). The dividends for the past 5 years are shown in the following​ table Year Dividend per Share 2015 ​$2.99 2014 ​$2.68 2013 ​$2.34 2012 ​$2.18 2011 ​$2.03 After underpricing and flotation​ costs, the firm expects to net ​$34.65 per share on a new issue.  Determine the...
A firm's new financing will be in proportion to the market value of its current financing...
A firm's new financing will be in proportion to the market value of its current financing shown below. Carrying Amount ($000 Omitted) Long-term debt $7,000 Preferred stock (100,000 shares) 1,000 Common stock (200,000 shares) 7,000 The firm's bonds are currently selling at 80% of par, generating a current market yield of 9%, and the corporation has a 40% tax rate. The preferred stock is selling at its par value and pays a 6% dividend. The common stock has a current...
Ross Textiles wishes to measure its cost of common stock equity. The​ firm's stock is currently...
Ross Textiles wishes to measure its cost of common stock equity. The​ firm's stock is currently selling for ​$61.65. The firm just recently paid a dividend of ​$4.14. The firm has been increasing dividends regularly. Five years​ ago, the dividend was just ​$3.04. After underpricing and flotation​ costs, the firm expects to net ​$56.72 per share on a new issue. a.  Determine average annual dividend growth rate over the past 5 years. Using that growth​ rate, what dividend would you...
What is the cost of new equity assuming the firm's stock price is currently selling for...
What is the cost of new equity assuming the firm's stock price is currently selling for $10 and will pay a dividend of $2 next year. The firm expects constant growth of 1.19% and floatation costs associated with the new equity issue of 20%. Write your answer as a decimal.
Ross Textiles wishes to measure its cost of common stock equity. The​ firm's stock is currently...
Ross Textiles wishes to measure its cost of common stock equity. The​ firm's stock is currently selling for ​$36.4136.41. The firm expects to pay a ​$3.263.26 dividend at the end of the year​ (2016). The dividends for the past 5 years are shown in the following​ table: ​(Click on the icon located on the​ top-right corner of the data table below in order to copy its contents into a​ spreadsheet.) Year Dividend per Share 2015 ​$2.962.96 2014 ​$2.742.74 2013 ​$2.322.32...
11.    A firm's preferred stock pays an annual dividend of $2, and the stock sells for $65....
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...
Conner Corporation common stock is selling for $30.35 per share. The last dividend was $2.42 per...
Conner Corporation common stock is selling for $30.35 per share. The last dividend was $2.42 per share. The expected long run dividend growth rate is a constant 9 percent per year. The stock's expected capital gains yield is?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT