2019 Current assets $2,000 Net fixed assets 3,000 Total assets $5,000 Accounts payable and accruals $ 900 Short-term debt 100 Long-term debt 1,100 Preferred stock (10,000 shares) 250 Common stock (50,000 shares) 1,300 Retained earnings 1,350 Total common equity $2,650 Total liabilities and equity $5,000
Here is the condensed 2019
Skye's earnings per share last year were $3.20. The common stock sells for $55.00, last year's dividend (Do) was $2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Skye's
a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the
b. Now calculate the cost of common equity from retained earnings, using the CAPM method.
c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between re and r as determined by the DCF method, and add that differential to the CAPM value for r .)
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