Question

1. Banyan Co.’s common stock currently sells for $35.25 per share. The growth rate is a constant 5%, and the company has an expected dividend yield of 5%. The expected long-run dividend payout ratio is 50%, and the expected return on equity (ROE) is 10.0%. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be the cost of new equity? Do not round intermediate calculations. Round your answer to two decimal places.

2.

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 8%, and its marginal tax rate is 25%. The current stock price is P₀ = $29.00. The last dividend was D₀ = $3.50, and it is expected to grow at a 5% constant rate. What is its cost of common equity and its WACC? Do not round intermediate calculations. Round your answers to two decimal places.

r_s =   %

WACC =   %

3. Jarett & Sons's common stock currently trades at $30.00 a share. It is expected to pay an annual dividend of $2.25 a share at the end of the year (D₁ = $2.25), and the constant growth rate is 3% a year.

1. What is the company's cost of common equity if all of its equity comes from retained earnings? Do not round intermediate calculations. Round your answer to two decimal places.

     %

2. If the company issued new stock, it would incur a 10% flotation cost. What would be the cost of equity from new stock? Do not round intermediate calculations. Round your answer to two decimal places   

Answer 1

1. Dividend =Dividend Yield*Share Price =5%*35.25 =1.7625
Required Rate =Dividend Yield+Growth =5%+5%=10%
Cost of New Equity =Expected Dividend/(Price*(1-Flotation Cost))+Growth =1.7625/(35.25*(1-5%))+5% =10.26%

2. Cost of Equity =Expected Dividend*(1+g)/Price+Growth =3.50*(1+5%)/29+5%=17.67%
WACC =Weight of Equity*Cost of Equity+Weight of Debt*Cost of Debt*(1-Tax Rate) =55%*17.67%+45%*8%*(1-25%)=12.42%

3. a. Cost of Equity =Expected Dividend/Price+Growth =2.25/30+3%=10.50%

b. Cost of New Equity =Expected Dividend/(Price*(1-Flotation Cost))+Growth=2.25/(30*(1-10%))+3%=11.33%