Haverty Corp\'s bonds are selling to yield new investors a return of 9%, while i

Question

Haverty Corp's bonds are selling to yield new investors a return of 9%, while it's preferred stock is yielding 11%. Flotation costs are 10% of the proceeds of new issues sold to the public, and the firm's tax rate is 40%. The company just paid a dividend of $2.00 and is expected to grow at 6% indefinitely. Its stock is selling for $21.20.
a. What is Haverty's cost of debt?
b. What is Haverty's cost of preferred stock?
c . d. What is Haverty's cost of retained earnings using the expected growth approach?
What is Haverty's cost of new equity?

Answer

Explanation / Answer

a. Haverty's cost of debt =9%*(1-40%)=5.40%
b. Haverty's cost of preferred stock=11%*90%=9.90%
d.21.20 =2*1.06/(re-6%)
re=16%
Haverty's cost of retained earnings =16%

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