Question

In: Finance

A company’s Balance Sheet (in millions)

Assets Liabilities & Equity

Current $120

Net Fixed $180 Bonds ($1000 Par) 130

Preferred stocks ($100 Par) 50

Total $200 Common Stock ($1 par) 20

Total $200

The company's bonds have 9 years to mature, pay 10% coupon rate semi-annually and comparable bonds' YTM is 11%.

The company’s applicable tax rate is 40%.

The market price of common stock is $12.50 per share.

The common stock dividend has grown at a steady rate from $0.68 in December 2000 to $1.48 in December 2010. The same growth rate is expected to continue for long time in the future.

The floatation cost for new common stocks is 15%.

The market value of the preferred stock is $75 and it pays quarterly dividend of $1.75.

The floatation cost on issuing new preferred stock is 7%

Next year is 2011.

What is the cost of issuing new common stock?

What is the cost of issuing new preferred stock?

Expert Solution

1)Number of years from 2000-2010 = 10 years

D10= D0 (1+g)^n

1.48 = .68 (1+g)^10

1.48/.68 = (1+g)^10

(2.17647)^1/10 = (1+g)

1.0809-1 = g

g = .0809 or8.09%

Cost of issuing new stock = [D10(1+g)/Price(1-F) ] + g

= [1.48(1+.0809)/12.5(1-.15)]+.0809

=[1.5997/10.625]+.0809

= .1506+.0809

= .2315 or 23.15%

b)cost of issuing new preferred stock = Annual dividend / price(1-F)

(1.75*4)/75(1-.07)

7/69.75

.1004 or 10.04%

jeff jeffy answered 2 years ago

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