Cost of Capital 26

Cost of Capital 26 - B C D E 51 Assume that inv estors in...

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Old Exam Questions - Cost of Capital Page 26 of 27 Pages B. 9.85% C. 10.35% D. 10.85% E. 11.35% 51. Assume that investors in the stock of Company A have a required rate of return of 14 percent. The company has just paid a dividend of $1.50 (D 0 = $1.50, which will grow at the firm’s constant, long-run sustainable growth rate) and the stock has a current price of $27.00. [HINT: you should now be able to determine the long-run sustainable growth rate.] The company’s investment bankers have told them that if they issue new stock, they could issue it at the current market price of $27.00 per share, but that flotation costs would be equal to $5.50 per share. Given this information, determine the firm’s cost of newly issued equity (r e ). A. 17.83% B. 16.68% C. 15.53% D. 14.38% E. 13.23% 52. Assume that a firm’s targeted capital structure consists of 35 percent debt, 15 percent preferred stock, and 50 percent common stock. Also assume that the current yield on the firm’s debt is 9 percent, the cost of stock is 15 percent, the tax rate is 40 percent,
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