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. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r. and as determined by the DCF method, and add that differential to the CAPM value for [..)
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. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r. and as determined by the DCF method, and add that differential to the CAPM value for [..)
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:**Balance Sheet Overview:**
- **Assets:**
- Current assets: $2,000
- Net fixed assets: $3,000
- Total assets: $5,000
- **Liabilities:**
- Accounts payable and accruals: $900
- Short term debt: $100
- Long term debt: $1,100
- **Equity:**
- 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
---
**Financial Analysis Insight:**
Sunrise's earnings per share last year were $3.20. The common stock is priced at $52.00. Last year's dividend (\(D_0\)) was $2.25, and issuing new common stock incurs a flotation cost of 10%. Analysts predict the common dividend will grow annually at 8.8%. The preferred stock dividend is $2.90 per share, with shares priced at $25.00.
- **Debt Cost:**
- Before-tax cost of debt: 12%
- Marginal tax rate: 25%
- **Existing Debt Structure:**
- 10% annual coupon rate for long-term debt at par value.
- **Market Influences:**
- Market risk premium: 5.2%
- Risk-free rate: 5.5%
- Sunrise's beta: 1.526
- **Debt Total:**
- Total debt is $1.2 million (sum of short-term and long-term debts).
---
**Problem Analysis:**
**Question:** What is the cost of new common stock based on the CAPM?
**Hint:** Calculate the difference between \( r_s \) obtained through the Discounted Cash Flow (DCF) method and adjust the CAPM value for \( r_s \) by this differential.
Use this data to address questions in the assignment.
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