Question

Question 3

a)

The Evanec Company's next expected dividend, D1, is $3.63; its growth rate is 5%; and its common stock now sells for $30. New stock (external equity) can be sold to net $25.50 per share.

What is Evanec's cost of retained earnings, rs? Round your answer to two decimal places.

What is Evanec's percentage flotation cost, F? Round your answer to two decimal places.

What is Evanec's cost of new common stock, re? Round your answer to two decimal places.

b)

COST OF COMMON EQUITY AND WACC

Palencia Paints Corporation has a target capital structure of 45% debt and 55% common equity, with no preferred stock. Its before-tax cost of debt is 9%, and its marginal tax rate is 40%. The current stock price is P₀ = $30.00. The last dividend was D₀ = $2.50, and it is expected to grow at a 7% constant rate. What is its cost of common equity and its WACC? Round your answers to two decimal places. Do not round your intermediate calculations.

Answer 1

a.Costof retained earnings=(D1/Current price)+Growth rate

=(3.63/30)+0.05

=17.10%

% floatation cost=(Current price of stock-Current net price of external equity)/Current price of stoc

=(30-25.5)/30

=15%

cost of new common stock=(D1/Current net  price)+Growth rate

=(3.63/25.5)+0.05

=19.24%(Approx).

b.

Cost of common equity=(D1/Current price)+Growth rate

=(2.5*1.07)/30+0.07

=15.92%(Approx)

Cost of debt after tax=9*(1-tax rate)

=9(1-0.4)=5.4%

WACC=Respective costs*Respective weights

=(15.92*0.55)+(5.4*0.45)

=11.18%(Approx)