A firm has determined its optimal capital structure which is composed of the following sources. Preferred Stock: The firm has determined it can issue preferred stock at RM75 per share par value. The stock will pay a RM10 annual dividend. The cost of issuing and selling the stock is RM3 per share. Common Stock: The firm’s common stock is currently selling for RM18 per share. The dividend expected to be paid at the end of the coming year is RM1.74. Its dividend payments have been growing at a constant rate of 3% for the last four years. It is expected that to sell, a new common stock issue must be underpriced, with floatation costs of RM1 per share. Based on the above information, what is the firm’s cost of preferred stock and cost of a new issue of common stock? Which of the two sources offers a lower cost? Show your workings.
A firm has determined its optimal capital structure which is composed of the following sources.
The firm has determined it can issue preferred stock at RM75 per share par value. The stock will pay a RM10 annual dividend. The cost of issuing and selling the stock is RM3 per share.
Common Stock:
The firm’s common stock is currently selling for RM18 per share. The dividend expected to be paid at the end of the coming year is RM1.74. Its dividend payments have been growing at a constant rate of 3% for the last four years.
It is expected that to sell, a new common stock issue must be underpriced, with floatation costs of RM1 per share.
Based on the above information, what is the firm’s cost of preferred stock and cost of a new issue of common stock? Which of the two sources offers a lower cost? Show your workings.
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