0-3 COST OF COMMON EQUITY Percy Motors has a target capital structure of 40% debt and 60% common equity, with no preferred stock. The yield to maturity on the company’s outstanding bonds is 9%, and its tax rate is 40%. Percy’s CFO estimates that the company’s WACC is 9.96%. What is Percy’s cost of common equity? 10-4 COST OF EQUITY WITH AND WITHOUT FLOTATION Javits & Sons’ common stock currently trades at $30.00 a share. It is expected to pay an annual dividend of $3.00 a share at the end of the year (D1 ¼ $3.00), and the constant growth rate is 5% a year. a. What is the company’s cost of common equity if all of its equity comes from retained earnings?
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
10-3 COST OF COMMON EQUITY Percy Motors has a target capital structure of 40% debt and
60% common equity, with no
outstanding bonds is 9%, and its tax rate is 40%. Percy’s CFO estimates that the company’s
WACC is 9.96%. What is Percy’s cost of common equity?
10-4
trades at $30.00 a share. It is expected to pay an annual dividend of $3.00 a share at the
end of the year (D1 ¼ $3.00), and the constant growth rate is 5% a year.
a. What is the company’s cost of common equity if all of its equity comes from
earnings
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