Cost of Capital - Solutions11

Cost of Capital - Solutions11 - 44. * Your companys stock...

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Old Exam Questions - Cost of Capital - Solutions Page 34 of 42 Pages 44. Your company’s stock currently has a price of $40 per share and is expected to pay a year-end dividend of $1.00 per share (D 1 = $1.00). The dividend is expected to grow at a constant rate of 6 percent per year. The company has insufficient retained earnings to fund capital projects and must, therefore, issue new common stock. The new stock has an estimated flotation cost of $5 per share. Determine the company's cost of new equity capital. A. 9.40% B. 8.59% C. 9.13% D. 9.67% * E. 8.86% In this case, F is in dollar form, not a percent of the stock’s price: r e = D 1 /(P 0 - F) + g = $1.00/($40 - $5) + 6% = $1.00/$35 + 6% = 2.86% + 6% = 8.86% 45. Your firm has estimated that it will spend $10 million on new capital budgeting projects during the coming year and has collected the following information: Your firm’s targeted capital structure consists of 40 percent debt, 10 percent preferred, and 50 percent common equity. Your firm expects to add $3.0 million to retained earnings over the coming year that can be used to support the $10 million in new projects. The company has corporate bonds outstanding that have 10 years until maturity, a face value of $1,000, a semi-annual coupon of $40, and a current price of $934.96. New debt (at least $7 million) can be issued as a private placement (no flotation
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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Cost of Capital - Solutions11 - 44. * Your companys stock...

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