Question

a. Your chief operating officer argues the following: a. “our stock price is currently $60, and our dividend per share is $6. It means that it costs us 10 percent to use shareholders’ cash ($6 divided by $60).”

b. “From our balance sheet, our liabilities are $80 million. From our income statement, our interest expenses are $5 million. Thus our cost of debt is 6.25 percent ($5 million divided by $80 million).”

Which statement is true or false?

Answer 1

a. The statement is false.

10 % is the dividend yield recieved by the shareholders. It is not cost for co as ignores the growth value . As cost of equity involves dividends yield + growth.

b. The statement is false.

Liablities are two kinds ie unterest bearing and non interest bearing. Alos there are current liabilkities on which no interest is required to be paid. Hence liabilities cannot be considered to be whole interest bearing and the cost calculated is wrong.