. Ross and Sons Inc. has a target capital structure that calls for 40 percent de

Question

. Ross and Sons Inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. The firm's current after-tax cost of debt is 6 percent, and it can sell as much debt as it wishes at this rate. The firm's preferred stock currently sells for $90 per share and pays a dividend of $10 per share; however, the firm will net only $80 per share from the sale of new preferred stock. Ross's common stock currently sells for $40 per share. The firm recently paid a dividend of $2 per share on its common stock, and investors expect the dividend to grow indefinitely at a constant rate of 10 percent per year.

____ 8. Refer to J. Ross and Sons Inc. What is the firm's cost of common stock, rs?

Explanation / Answer

rs = {[$2.00(1.10)] / $40.00} + 0.10

rs = 0.055 + 0.10

rs = 0.155 or 15.5%

The firm's cost of common stock, rs is 15.5%

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