ive million additional shares of common stock will be issued by Cyber Corporation to fund a new venture. The additional shares will raise the number of outstanding shares to 25 million. Cyber's current required rate of return is 12.6 percent, while its long-term growth rate is 6%. The company just distributed a $1.00 dividend, and the stock is currently trading for $16.06. The company's stock price decreased once the news of the new equity issuance was announced. Cyber predicts that the new project would boost the company's growth rate to 6.5 percent, but because the initiative is riskier than normal, the cost of capital for the company will rise to 13.5 percent. What is the change in the equilibrium stock price?
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Five million additional shares of common stock will be issued by Cyber Corporation to fund a new venture. The additional shares will raise the number of outstanding shares to 25 million. Cyber's current required
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