Question

The cost of issuing new common stock is calculated the same way as the cost of raising equity capital from retained earnings. True: The cost of retained earnings and the cost of new common stock are calculated in the same manner, except that the cost of retained earnings is based on the firm's existing common equity, while the cost of new common stock is based on the value of the firm's share price net of its flotation cost. False: Flotation costs need to be taken into account when calculating the cost of issuing new common stock, but they do not need to be taken into account when raising capital from retained earnings. White Lion Homebuilders is considering investing in a one-year project that requires an initial investment of $500,000. To do so, it will have to issue new common stock and will incur a flotation cost of 2.00%. At the end of the year, the project is expected to produce a cash inflow of $595,000. The rate of return that White Lion expects to earn on its project (net of its flotation costs) is (rounded to two decimal places). Alpha Moose Transporters has a current stock price of $33.35 per share, and is expected to pay a per-share dividend of $2.03 at the end of the year. The company's earnings' and dividends' growth rate are expected to grow at the constant rate of 8.70% into the foreseeable future. If Alpha Moose expects to incur flotation costs of 5.00% of the value of its newly-raised equity funds, then the flotation-adjusted (net) cost of its new common stock (rounded to two decimal places) should be White Lion Homebuilders Co.'s addition to earnings for this year is expected to be $745,000. Its target capital structure consists of 35% debt, 5% preferred, and 60% equity. Determine White Lion Homebuilders's retained earnings breakpoint: $1,241,667 O $2,128,571 $1,117,500 $1,490,000

Answer 1

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TE FR 62 ke - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins - 2x % Cut Σ AutoSum : A Calibri -11AA = = = Dr Wrap Text General E Copy Fill Paste B - I D U A 3 Merge & Center Merge & Center $ - % $ - % , 8.9 & Conditional Format Cell Sort & Insert Delete Format Find & Format Painter cleare Sort & Find & Formatting as Table Styles Clipboard Font Alignment Number Styles Cells Editing FV72 FOFP FQ E Formula Bar FU FV FW FX 61 1 FALSE: FLOTATION COSTS NEED TO BE TAKEN INTO ACCOUNT WHEN CALCULATINGTHE COST OF ISSUING 63 NEW STOCK, BUT THEY DO NOT NEED TO BE TAKEN INTO ACCOUNT WHEN RAISING CAPITAL FROM RETAINED EARNINGS 64 65 2 INITIAL INVESTMENT 500000 66 ADD: FLOTATION COST (2%) 10000 67 TOTAL COST 510000 68 CASH INFLOW 595000 69 RATE OF RETURN = (595000/510000) - 1 = 16.67% 70 71 72 3 PO = 33.35 g=5.0% 73 D1=2.03 f=8.70% 74 ke = D1/PO(1-f) + g = 2.03/(33.35(1-0.087)) + 0.05 = 11.67% 76 77 4 COMPANY'S RETAINED EARNINGS BREAK POINT = ADDITION TO RETAINED EARNINGS/WEIGHT OF EQUITY 745000/0.60 = 1241667 79 M KE CAPM UTILITY, SHARPE, beta convexity DGM beta port future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean YIELD bond portfolio cap stru WACC RESI el Rea ferences: A1310 BO 130% - .. 9 * 10 ENG 04-11-2019 78 H