A company reported earnings available to common shareholders as $4,200,000 last year. From those earnings, the company paid a dividend of $1.26 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 40% debt, 10% preferred stock, and 50% common stock. It is taxed at a rate of 40%. a) If the market price of common stock is $40 and the dividend is expected to grow at a rate of 6% per year for the foreseeable future, what is the company’s cost of retained earnings financings b) If underpricing and flotations costs on new shares are $7.00 per share, what is the company’s cost of new common stock financing?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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A company reported earnings available to common shareholders as $4,200,000 last year. From those earnings, the company paid a dividend of $1.26 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 40% debt, 10% preferred stock, and 50% common stock. It is taxed at a rate of 40%.

a) If the market price of common stock is $40 and the dividend is expected to grow at a rate of 6% per year for the foreseeable future, what is the company’s cost of retained earnings financings

b) If underpricing and flotations costs on new shares are $7.00 per share, what is the company’s cost of new common stock financing?

 

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