A company’s Balance Sheet (in millions) Assets Liabilities & Equity Current $120
ID: 2658345 • Letter: A
Question
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?
Explanation / Answer
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%
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