Question

Cost of new common stock A firm needs to take flotation costs into account when it is raising capital fromissuing new common stock . True or False: The following statement accurately describes how firms make decisions related to issuing new common stock. If a firm needs additional capital from equity sources once the retained earnings breakpoint is reached, it will have to raise the capital by issuing new common stock. True: Firms will raise all the equity they can from retained earnings before issuing new common stock, because capital from retained earnings is cheaper than capital raised from issuing new common stock. False: Firms raise capital from retained earnings only when they cannot issue new common stock due to market conditions outside of their control. Cold Goose Metal Works Inc. is considering a one-year project that requires an initial investment of $650,000; however, in raising this capital, Cold Goose will incur an additional flotation cost of 6%. At the end of the year, the project is expected to produce a cash inflow of $975,000. The rate of return that Cold Goose expects to earn on the project after its flotation costs are taken into account is . Cold Goose has a current stock price of $22.35 and is expected to pay a dividend of $2.03 at the end of next year. The company’s growth rate is expected to remain constant at 6%. If the issue's flotation costs are expected to equal 6% of the funds raised, the flotation-cost-adjusted cost of the firm's new common stock is . Cold Goose’s addition to earnings for this year is expected to be $420,000. Its target capital structure consists of 40% debt, 5% preferred stock, and 55% common stock. Cold Goose Metal Works Inc.’s retained earnings breakpoint is (rounded to the nearest whole dollar).

Answer 1

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C w ENG 00:56 30-07-2020 99+ 32 Х FV447 . FO FP FO FR FS FT FU FV FW E) 432 TRUE: A firm needs to take flotation costs into account when it is raising capital from issuing new common stock. TRUE: If a firm needs additional capital from equity sources once its retained earnings breakpoint is reached, it will have to raise the capital by issuing new common stock. 433 Q.1 434 435 436 437 438 Q.2 439 440 441 Q.3 442 443 TRUE: Firms will raise all the equity they can from retained earnings before issuing new common stock, because capital from retained earnings is cheaper than capital raised from issuing new common stock 650000 39000 INITIAL INVESTMENT ADD : FLOTATION COST (6%) TOTAL COST CASH INFLOW RATE OF RETURN = (975000/689000) - 1 = 689000 444 445 446 975000 41.51% 447 Q.4 448 PO = 22.35 D1= 2.03 f=6% ke = D1/PO(1-f) + g = 2.03/(22.35(1-0.06)) + 0.06 = g = 6% 15.66% 449 450 451 Q.5 452 COMPANY'S RETAINED EARNINGS BREAK POINT = ADDITION TO RETAINED EARNINGS/ WEIGHT OF EQUITY 420000/0.55 = 763636 763636 [ROUNDED TO ZERO DECIMAL] 453 454 455 KE CAPM UTILITY, SHARPE, beta coNvexity DGM beta VAR port future INDEX WACC HEDGE INTL CAP BUD Sheet11 SANDI ... +