{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

# D1 kn g p0 f kncostofsaleofnewcommonstock

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: uity – Dividend Growth Model kS = D1 +g P0 Example: Example: The market price of a share of common stock is \$60. The prior dividend (D0) is \$3, and the expected growth rate is 10%. (D1 = 3.00 x 1.10 = 3.30) kS = 3.30 60 + .10 =.055 + .10 = 15.5% =.055 3. Compute Cost of Common Equity Cost of New Common Stock – Must adjust the Dividend Growth Model equation for flotation (F) costs of the new common shares. D1 kn = +g P0 - F Kn = cost of sale of new common stock D1 is the next dividend to be paid Po is the current market price of shares outstanding F is the flotation cost G is the rate of growth 17 17 3. Compute Cost of Common Equity Example: Example: If additional shares are issued, floatation costs will be 12% of price per share. D0 = \$3.00 and estimated growth is 10%, Price is \$60 as before. Flotation cost = \$60 x .12 = \$7.20. (Po – F = \$60.00 – 7.20 = \$52.80) (D1 = 3.00 x 1.10 = 3.30) kn = 3.30 + .10 52.80 = .0625 + .10 = 16.25% 18 18 Weighted Average Cost of Capital Weighted Gallagher Corporation estimates the following costs for each component in its capital structure: Source of Capital Cost Bonds (after tax) kd = 6.0% Preferred Stock kp = 11.9% Common Stock Retained Earnings ks = 15.5% New Shares kn = 16.25% Gallagher’s tax rate is 40% 19 19 Weighted Average Cost of Capital If using retained earnings (Internal Equity) to finance the equity portion: WACC = (WTd x AT kd ) + (WTp x kp ) + (WTs x ks) WACC = weighted average cost of capital WT = the weight, or percentage of each element of capital (% of debt, preferred and common stock to total assets) ATkd = after tax cost of debt Kp = Cost of preferred stock Ks = Cost of equity (Internal – retained earnings) Weighted Average Cost of Capital Weighted If using retained earnings (internal equity) to finance the common equity portion : WACC= ka= (WTd x AT kd ) + (WTp x kp ) + (WTs x ks) Assume that Gallagher’s desired capital structure is 40% debt, 10% preferred and 50% common equity. 21 21 Weighted Average Cost of Capital If using retained earnings (Internal Equity) to finance the equity portion: WACC = (WTd x AT kd ) + (WTp x kp ) + (WTs x ks) Assume that Gallagher’s desired capital structure...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online