Cost of Capital 14

Cost of Capital 14 - 20 Assume that a company just paid a...

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Old Exam Questions - Cost of Capital Page 14 of 27 Pages 20. Assume that a company just paid a $1.50 per share dividend on its common stock (D 0 = $1.50), that the dividend is expected to grow at a constant rate of 8 percent per year, and that investors require a 12 percent rate of return. Now assume that if the company issues additional stock, it must pay its investment banker a flotation cost of $2.50 per share. Given this information, determine the cost of new external equity, K e . A. 12.15% B. 12.59% C. 12.37% D. 12.48% E. 12.26% 21. Assume that a firm’s optimal capital structure consists of 30% debt at a before-tax cost of debt (K D ) of 6 percent, 10% preferred stock at a cost of preferred (K P ) of 8 percent, and 60% stock; that the firm’s tax rate is 40%; and that the firm’s weighted average cost of capital is equal to 9.56 percent (assume retained earnings and ignore flotation costs). Now assume that markets are in equilibrium (required rates are equal to expected rates), that the current price (Year 0) of the firm’s “constant growth” stock is
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