Question

5. The cost of new common stock True or False: The following statement accurately describes how firms make decisions related to issuing new common stock. Taking flotation costs into account will reduce the cost of new common stock. False: Flotation costs are additional costs associated with raising new common stock. True: Taking flotation costs into account will reduce the cost of new common stock, because you will multiply the cost of new common stock by 1 minus the flotation cost-similar to how the after-tax cost of debt is calculated. Alpha Moose Transporters 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 $550,000. The rate of return that Alpha Moose expects to earn on its project (net of its flotation costs) is (rounded to two decimal places). Sunny Day Manufacturing Company 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 5.20% into the foreseeable future. If Sunny Day expects to incur flotation costs of 3.750% 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

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

- 2x Σ AutoSum : A Fill 2 Clear ke - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri -11AA = = = Dr Wrap Text General Ea Copy Paste Format Painter B I U D A E Merge & Center $ - % 8. Formatting as Table Styles Clipboard Font Alignment Number Styles FU230 FOFPFQ FR ES FT FU FV 228 1 FALSE: FLOTATION COSTS ARE ADDITIONAL COSTS ASSOCIATED WITH RAISING NEW COMMON STOCK 229 FLOTATION COST WILL RAISE THE COST OF NEW COMMON STOCK Sort & Filter Editing Find & Select Cells FW EX FE 230 231 232 233 2 INITIAL INVESTMENT ADD: FLOTATION COST (2%) TOTAL COST CASH INFLOW RATE OF RETURN = (550000/510000) - 1 = 500000 10000 510000 550000 7.84% 234 235 236 237 238 239 3 PO = 33.35 D1=2.03 g=5.2% f=3.75% ke = D1/PO(1-f) + g = 2.03/(33.35(1-0.0375)) + 0.052 = 240 11.52% 241 242 243 244 245 246 HE Rea 4 COMPANY'S RETAINED EARNINGS BREAK POINT = ADDITION TO RETAINED EARNINGS/WEIGHT OF EQUITY 745000/0.55 = 1354545 convexity DGM beta port future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean YIELD bond portfolio KE CAPM UTILITY, SHARPE, beta ferences: A1310 cap stru WACC BOI 130% RESI el - O- DO 4 * 4 OENG 05-11-2019