8. Kelly Corporation will issue new common stock to finance an expansion. The ex

Question

8. Kelly Corporation will issue new common stock to finance an expansion. The existing common stock just paid a $1.50 dividend, and dividends are expected to grow at a constant rate 8% indefinitely. The stock sells for $45, and flotation expenses of 5% of the selling price will be incurred on new shares. What is the cost of new common stock be for Kelly Corp.? (Points : 1)
11.33%
11.51%
11.60%
11.79%
12.53%


9. The simulation approach provides us with (Points : 1)
a single value for the risk-adjusted net present value.
an approximation of the systematic risk level.
a probability distribution of the project's net present value or internal rate of return.
a graphic exposition of the year-by-year sequence of possible outcomes.


10. Asian Trading Company paid a dividend yesterday of $5 per share (D0 = $4). The dividend is expected to grow at a constant rate of 8% per year. The price of Asian Trading Company's stock today is $29 per share. If Asian Trading Company decides to issue new common stock, flotation costs will equal $2.50 per share. Asian Trading Company's marginal tax rate is 35%. Based on the above information, the cost of retained earnings is (Points : 1)
28.38%.
24.12%.
26.62%.
31.40%.

Explanation / Answer

Dividend just paid (D0) = $1.50

Expected dividend growth rate (g) = 8%

Current stock value = $45

Flotation expenses = 5%

Cost of new common stock (R) =?

Cost of new common stock (R) = [(D1 / {P0 – F}] + g

D1 = $1.50 (1+0.8)

D1 = $1.62

Flotation Costs = 5% of selling price

Cost of new common stock (R) = [($1.62 / {$45 - $2.25}] + 0.08

Cost of new common stock (R) = = [$1.62 / $42.75] + 0.08

Cost of new common stock (R) = 0.11789 (or) 11.79%

Cost of new common stock (R) = 11.79%

Expected dividend growth rate (g) = 8% per year

Today’s Stock Value (P0) = $29 per share

Flotation Costs = $2.50 per share

Marginal tax rate = 35%

Cost of retained earnings = ?

D1 = $5 (1+0.8)

D1 = $5.40

Flotation Costs = $2.50 per share

Cost of Retained earnings (R) = [($5.40 / {$29 - $2.50}] + 0.08

Cost of Retained earnings (R) = [$5.40 / $26.50] + 0.08

Cost of Retained earnings (R) = 0.28377 (or) 28.38%

Cost of Retained earnings (R) = 28.38%

Related Questions

Navigate

• Browse (All)
• Browse 8
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.