rate positively ..
Answer a) | statement is TRUE : Firm will raise all equity they can from retained earning before issuing new common stock, because capital from retained earning is cheaper than capital from issuing new common stock | ||||||||||
Answer b) | |||||||||||
intial investment | 450000 | ||||||||||
Flotation cost | 2% | ||||||||||
Therefore firm must need to raise 450000/(1-2%) to get net of 475000 as investable amount | |||||||||||
i | Total cost of investment = | =450000/98% | 459183.7 | ||||||||
ii | expected cash inflow = | 595000 | |||||||||
iii=ii-i | return | 135816.33 | |||||||||
iv=iii/i | rate of return | 29.58% | |||||||||
Answer c) | Current share price = | 33.35 | |||||||||
Expected dividend = | 2.03 | ||||||||||
growth rate = | 9.40% | ||||||||||
flotation cost = | 6.50% | ||||||||||
We can use DDM model to find the cost of common equity | |||||||||||
Formula used = | |||||||||||
cost of equity = | Expected dividend/ (Price *(1-flotation cost)) + growth rate | ||||||||||
=(2.03/(33.35*(1-6.5%))+9.4%) | |||||||||||
15.91% | |||||||||||
Answer d) | |||||||||||
retained earning breakpoint is the point where firm need not to go with issuing if new stock . | |||||||||||
Given that current equity ratio = 60% | |||||||||||
Additional earning = | 745000 | ||||||||||
At current capital structure firm need not to go for issue of new stock upto the investment of = 745000/60% | |||||||||||
earning breakpoint | 1241667 | ||||||||||
hence, correct answer is option : | 1241667 | ||||||||||
True or False: The following statement accurately describes how firms make decisions related to issuing new...
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