Current assets Net Fixed assets Total assets Accounts payable and accurals. Short term debt Long term debt Preferred Stock (10,000 shares) Common Stock (50,000 shares) Retained earnings Total common equity Total liabilities and equity $2,000 3,000 $5,000 $900 100 1,100 250 1,300 1,350 $2,650 $5,000 Sunrise's earnings per share last year were $3.20. The common stock sells for $52.00, last year's dividend (D)was $2.25, 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 8.8%. Sunrise's preferred stock pays a dividend of $2.90 per share, and its preferred stock sells for $25.00 per share. The firm's before-tax cost of debt is 12%, and its marginal tax rate is 25%. The firm's currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5.2%, the risk- free rate is 5.5%, and Sunrise's beta is 1.526. The firm's total debt, which is the sum of the company's short-term debt and long-term debt, equals $1.2 million. Use this data to answer the questions in the assignment. Calculate the cost of the following capital components (answers should be in % with two decimal points): the cost of newly issued common stock using the DCF method Now calculate the cost of common equity from retained earnings, using the CAPM method
Current assets Net Fixed assets Total assets Accounts payable and accurals. Short term debt Long term debt Preferred Stock (10,000 shares) Common Stock (50,000 shares) Retained earnings Total common equity Total liabilities and equity $2,000 3,000 $5,000 $900 100 1,100 250 1,300 1,350 $2,650 $5,000 Sunrise's earnings per share last year were $3.20. The common stock sells for $52.00, last year's dividend (D)was $2.25, 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 8.8%. Sunrise's preferred stock pays a dividend of $2.90 per share, and its preferred stock sells for $25.00 per share. The firm's before-tax cost of debt is 12%, and its marginal tax rate is 25%. The firm's currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5.2%, the risk- free rate is 5.5%, and Sunrise's beta is 1.526. The firm's total debt, which is the sum of the company's short-term debt and long-term debt, equals $1.2 million. Use this data to answer the questions in the assignment. Calculate the cost of the following capital components (answers should be in % with two decimal points): the cost of newly issued common stock using the DCF method Now calculate the cost of common equity from retained earnings, using the CAPM method
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
Problem 1PS
Related questions
Question
Transcribed Image Text:### Financial Overview
#### Balance Sheet Summary
- **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
#### Earnings and Stock Analysis
- **Earnings per Share Last Year:** $3.20
- **Current Common Stock Price:** $52.00
- **Last Year’s Dividend (D₀):** $2.25
- **Flotation Cost for New Common Stock:** 10%
- **Annual Growth Rate of Common Dividend (Projected):** 8.8%
- **Preferred Stock Dividend:** $2.90 per share
- **Preferred Stock Selling Price:** $25.00 per share
- **Before-Tax Cost of Debt:** 12%
- **Marginal Tax Rate:** 25%
#### Current Debt Details
- **Current Outstanding Long-term Debt Coupon Rate:** 10%
- **Market Risk Premium:** 5.2%
- **Risk-Free Rate:** 5.5%
- **Sunrise’s Beta:** 1.526
- **Total Debt (Short-term and Long-term):** $1.2 million
### Tasks
- **Calculate the cost of newly issued common stock using the Discounted Cash Flow (DCF) method.**
- **Calculate the cost of common equity from retained earnings using the Capital Asset Pricing Model (CAPM) method.**
These calculations should be rounded to two decimal points.
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