Question

If the $1,000 face value, 8% annual coupon bonds with 15 years remaining to maturity and a current market price of $1,150. $100 par value preferred stock that pays an 11% annual dividend and has a current market price of $92.Common stock with a current market price of $50/share. Investors expect the next annual dividend to be $4.00 and to grow after that at a constant rate of 7% per year into the foreseeable future.

If new securities today:

New bonds would pay interest annually, have a 15-year life, and incur a flotation cost of 3%.

A new issue of preferred stock would pay annual dividends and incur flotation costs of 6%

A new issue of common stock would incur flotation costs of 8%.

income is taxed at a 35% marginal rate.

The target capital structure is 35% long-term debt, 15% preferred stock, and 50% common equity.

The forecasts it will retain $25,000,000 of earnings in the coming year.

1.    What is the required rate of return of common stockholders?
2.    What is the cost of retained earnings financing?
3.    What is the cost of a new common stock issue?

           

Answer 1

a)

b)

c)