Activity-Cost-of-Capital.pdf - Cost of Capital 1 2 A firms...

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Cost of Capital 1. A firm’s common stock currently trades at P30 per share. It is expected to pay an annual dividend of P3 per share at the end of the year. The constant growth rate is 5% per year. a. What is the company’s cost of common equity if all of its equity comes from retained earnings? __________________________ b. If the company issues new stocks, it will incur a 10% flotation cost. What is the cost of equity from the new stocks? __________________________ 2. Alaska’s future earnings, dividends and common stock price are expected to grow at 5% per year. Alaska’s common stock currently sells for P23 per share, its last dividend was P2 and it will pay P2.10 dividend at the end of the current year. a. What is its cost of common equity using the Gordon’s growth model? __________________ b. If the firm’s beta is 1.5, the risk free rate is 7%, and the average return on the marke t is 12%, what is the firm’s cost of common equity using the CAPM? _______________________ c. If the firm’s bonds earn a return of 10% based on the bond -yield-plus-risk-premium approach, what will be the cost of common equity? ______________________ d.

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