Edna Recording Studios, Inc., reported earnings available to common stock of $4,000,000 last year. From those earnings, the company paid a dividend of $1.17 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 35% debt, 25% preferred stock, and 40% common stock. It is taxed at a rate of 21%. a. If the market price of the common stock is $39 and dividends are expected to grow at a rate of 6% per year for the foreseeable future, what is the company's cost of retained earnings financing? b. If underpricing and flotation costs on new shares of common stock amount to $9 per share, what is the company's cost of new common stock financing? c. The company can issue $2.12 dividend preferred stock for a market price of $35 per share. Flotation costs would amount to $5 per share. What is the cost of preferred stock financing?
Edna Recording Studios, Inc., reported earnings available to common stock of $4,000,000 last year. From those earnings, the company paid a dividend of $1.17 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 35% debt, 25% preferred stock, and 40% common stock. It is taxed at a rate of 21%. a. If the market price of the common stock is $39 and dividends are expected to grow at a rate of 6% per year for the foreseeable future, what is the company's cost of retained earnings financing? b. If underpricing and flotation costs on new shares of common stock amount to $9 per share, what is the company's cost of new common stock financing? c. The company can issue $2.12 dividend preferred stock for a market price of $35 per share. Flotation costs would amount to $5 per share. What is the cost of preferred stock financing?
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
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Edna Recording Studios, Inc., reported earnings available to common stock of $4,000,000 last year. From those earnings, the company paid a dividend of $1.17 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 35% debt, 25% preferred stock, and 40% common stock. It is taxed at a rate of 21%.
a. If the market price of the common stock is $39 and dividends are expected to grow at a rate of 6% per year for the foreseeable future, what is the company's cost of retained earnings financing?
b. If underpricing and flotation costs on new shares of common stock amount to $9 per share, what is the company's cost of new common stock
financing?
c. The company can issue $2.12 dividend preferred stock for a market price of $35 per share. Flotation costs would amount to $5 per share. What is the cost of preferred stock financing?
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