Question

Company XYZ will pay in exactly one year $4 in dividends per share to its common stock shareholders. In exactly one year it will pay $2 in didends per Share to holders of its preferred stock. The flotation costs on a per share basis for common stock are 57 and for preferred stock are 52. Common stock dividends are expected to grow 5% each year preferred stock dividends will not change. The company can issue $1,000 par value, 12% coupon, ten-year bonds that can be sold for $950 each. Flotation costs for each bond equal $30. The current per share prices for common stock and preferred stock are $19 and $11, respectively. The company's tax rate is 40%. The company's target capital structure is 70% retained earings, 20% new preferred stock issues, and 10% new debt (bonds) What is r. (new common stock issue)? Select one: O a 20.89% O b. 25.45% O c. 30.25% O d. 38.33% O e None of the above What is T, (new preferred stock issue)? Select one a 22.22% O b. 25 65% c.28.57% Od 35 28%

Answer 1

1). rN = [D1 / (P0 - fC)] + g

= [$4 / ($19 - $7)] + 0.05

= 0.3333 + 0.05 = 0.3833, or 38.33%

Hence, Option "d" is correct.

2). rP = D1 / (P0 - fC)

= $2 / [$11 - $2] = $2 / $9 = 0.2222, or 22.22%

Hence, Option "a" is correct.