A firm will never have to take flotation costs into account when calculating the cost of raising capital from . True or False: The following statement accurately describes how firms make decisions related to issuing new common stock. The cost of issuing new common stock is calculated the same way as the cost of raising equity capital from retained earnings. Pick A or B A- False: Flotation costs need to be taken into account when calculating the cost of issuing new common stock, but they do not need to be taken into account when raising capital from retained earnings. B- True: The cost of retained earnings and the cost of new common stock are calculated in the same manner, except that the cost of retained earnings is based on the firm’s existing common equity, while the cost of new common stock is based on the value of the firm’s share price net of its flotation cost. Cold Goose Metal Works Inc. is considering a one-year project that requires an initial investment of $550,000; however, in raising this capital, Cold Goose will incur an additional flotation cost of 2%. At the end of the year, the project is expected to produce a cash inflow of $825,000. The rate of return that Cold Goose expects to earn on the project after its flotation costs are taken into account is_________________% . Cold Goose has a current stock price of $22.35 and is expected to pay a dividend of $2.03 at the end of next year. The company’s growth rate is expected to remain constant at 6%. If the issue's flotation costs are expected to equal 2% of the funds raised, the flotation-cost-adjusted cost of the firm's new common stock is_________________%
A firm will never have to take flotation costs into account when calculating the cost of raising capital from . True or False: The following statement accurately describes how firms make decisions related to issuing new common stock. The cost of issuing new common stock is calculated the same way as the cost of raising equity capital from retained earnings. Pick A or B A- False: Flotation costs need to be taken into account when calculating the cost of issuing new common stock, but they do not need to be taken into account when raising capital from retained earnings. B- True: The cost of retained earnings and the cost of new common stock are calculated in the same manner, except that the cost of retained earnings is based on the firm’s existing common equity, while the cost of new common stock is based on the value of the firm’s share price net of its flotation cost. Cold Goose Metal Works Inc. is considering a one-year project that requires an initial investment of $550,000; however, in raising this capital, Cold Goose will incur an additional flotation cost of 2%. At the end of the year, the project is expected to produce a cash inflow of $825,000. The rate of return that Cold Goose expects to earn on the project after its flotation costs are taken into account is_________________% . Cold Goose has a current stock price of $22.35 and is expected to pay a dividend of $2.03 at the end of next year. The company’s growth rate is expected to remain constant at 6%. If the issue's flotation costs are expected to equal 2% of the funds raised, the flotation-cost-adjusted cost of the firm's new common stock is_________________%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
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Cost of new common stock
A firm will never have to take flotation costs into account when calculating the cost of raising capital from .
True or False: The following statement accurately describes how firms make decisions related to issuing new common stock.
The cost of issuing new common stock is calculated the same way as the cost of raising equity capital from retained earnings . Pick A or B
A- False: Flotation costs need to be taken into account when calculating the cost of issuing new common stock, but they do not need to be taken into account when raising capital from retained earnings.
B- True: The cost of retained earnings and the cost of new common stock are calculated in the same manner, except that the cost of retained earnings is based on the firm’s existing common equity, while the cost of new common stock is based on the value of the firm’s share price net of its flotation cost.
Cold Goose Metal Works Inc. is considering a one-year project that requires an initial investment of $550,000; however, in raising this capital, Cold Goose will incur an additional flotation cost of 2%. At the end of the year, the project is expected to produce a cash inflow of $825,000. The rate of return that Cold Goose expects to earn on the project after its flotation costs are taken into account is_________________% .
Cold Goose has a current stock price of $22.35 and is expected to pay a dividend of $2.03 at the end of next year. The company’s growth rate is expected to remain constant at 6%. If the issue's flotation costs are expected to equal 2% of the funds raised, the flotation-cost-adjusted cost of the firm's new common stock is_________________%
Cold Goose’s addition to earnings for this year is expected to be $420,000. Its target capital structure consists of 40% debt, 5% preferred stock , and 55% common stock. Cold Goose Metal Works Inc.’s retained earnings breakpoint is $_______________(rounded to the nearest whole dollar).
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