The Boston Brewing Company is planning on issuing common stock at a market price of $13 per share. Last year the firm paid an annual dividend of $1.45, and analysyts expect the firm's future dividends will grow at an annual rate of 5 per cent forever. What is Boston Brewing Company's cost of common equity? a.16.71% b. 17.61% c. 17.71% d. 20.71%

The Boston Brewing Company is planning on issuing common stock at a market price of $13 per share. Last year the firm paid an annual dividend of $1.45, and analysyts expect the firm's future dividends will grow at an annual rate of 5 per cent forever. What is Boston Brewing Company's cost of common equity? a.16.71% b. 17.61% c. 17.71% d. 20.71%

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter9: The Cost Of Capital

Section: Chapter Questions

Problem 5P

See similar textbooks

Related questions

Q: What is the expected annual capital gain yield for Orange Corp stock, based on the Dividend Discount…

A: Here,ExpectedDividend is $8.37Growth Rate is 13.41%Required Return is 17.73%

Q: Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $2.25 at…

A: “Hey, since there are multiple questions posted, we will answer first question. If you want any…

Q: 6. Nielson Motors has a share price of $25 today. If Nielson Motors is expected to pay a dividend of…

A: 1) Dividend Yield Dividend yield = Dividend /Current share price = 0.75/ 25 = 3.0%

Q: Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $1.45 at…

A: Formula: Expected rate of return = (Expected dividend/Current stock price) + Growth rate

Q: A firm will pay an annual dividend of $6 on its common stock in one year, and its dividend will grow…

A: Next dividend (D1) = $6 Growth rate = g Stock price (P0) = $88 Cost of equity (r) = 12%

Q: Orwell building supplies' last dividend was $1.75. Its dividend growth rate is expected to be…

A: We will be using dividend discount model for this. Had it been a single stage dividend growth we…

Q: Salte Corporation is issuing new common stock at a market price of $27.00. Dividends last year were…

A: The below expression can be used to calculate cost of common equity:

Q: What is the expected annual capital gain for Orange Corp stock, based on the Dividend Growth Model?…

A: The capital gain yield is the annual percentage increase in the price of the stock. In the case of a…

Q: A firm is expected to pay a dividend of $3.90 one year from now and $4.25 two years from now and…

A: Step 1: The calculation of the stock's value ABCD1YearExpected CashflowPVF @ 13.78%PV of Cashflows21…

Q: NoRagrets, Inc is expected to pay a dividend in year 1 of $2 and a dividend in year 2 of $2.40.…

A: The dividend discount model will be used and applied here. As per the dividend discount model the…

Q: Nico Corporation's common stock currently sells for $180 per share. Nico just paid a dividend of…

A: In the above question we require to compute the Nico corporation's stock price one year from now.

Q: Pinkman Motors paid a dividend of $ 3.75 last year. If J Pinkmans return on equity is 24% and its…

A: Value of common stock can be calculated by using dividend growth model. This model consider dividend…

Q: What is the cost of internal common equity (retained earnings) if the long-term growth in dividends…

A: The cost of retained earnings doesn't involve any explicit cost but involves the opportunity cost.…

Q: This year, Hope Corporation paid a dividend of $0.50 per share. The company expect dividends to…

A: Value of share price = [D0 x (1 + g)]/(r - g) D0 = Current dividend g = Growth rate r = required…

Q: Ra

A: The objective of this question is to calculate the expected annual capital gain yield for Orange…

Q: Suppose Lilly V, Inc. has just paid a dividend. The next dividend, to be paid in a year, is…

A: To calculate the price of stock we will use the below formula Price of stock = D1/(Ke-g) Where D1…

Q: Credenza Industries is expected to pay a dividend of $1.30 at the end of the coming year. It is…

A: Current Price= (Expected dividend + Expected price) / (1 + Cost of capital)= (1.3 + 63) / (1 + 0.1)=…

Q: Click to see additional instructions Zee Corp. just paid an annual dividend of $0.40, which is…

A: Given, Dividend just paid, D0 = $0.40 Growth , g = 3.5% Discount rate, Ke = 5.5%

Question

100%

a.16.71%

b. 17.61%

c. 17.71%

d. 20.71%

Definition Definition Amount of return a company generally pays to its equity investors. The cost of equity represents the compensation required by the market in lieu of owning the asset firm and simultaneously bearing the risk of ownership.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Introduction

VIEW

Step 2: Cost of Common Equity

VIEW

Solution

VIEW

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Similar questions

The Castle Company recently reported net profits after taxes of $15.8 million. It has 2.5 million shares of common stock outstanding and pays preferred dividends of $1 million a year. The company’s stock currently trades at $60 per share. Compute the stock’s earnings per share (EPS). What is the stock’s P/E ratio? Determine what the stock’s dividend yield would be if it paid $1.75 per share to common stockholders.
Conroy Consulting Corporation (CCC) has a current dividend of D0 = $2.5. Shareholders require a 12% rate of return. Although the dividend has been growing at a rate of 30% per year in recent years, this growth rate is expected to last only for another 2 years (g0,1 = g1,2 = 30%). After Year 2, the growth rate will stabilize at gL = 7%. What is CCC’s stock worth today? What is the expected stock price at Year 1? What is the Year 1 expected (1) dividend yield, (2) capital gains yield, and (3) total return? What is its expected dividend yield for the second year? The expected capital gains yield? The expected total return?
CALCULATING THE WACC Here is the condensed 2019 balance sheet for Skye Computer Company (in thousands of dollars): Skyes earnings per share last year were 3.20. The common stock sells for 55.00. last years dividend (D0) was 2.10, 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 9%. Skyes preferred stock pays a dividend of 3.30 per share, and its preferred stock sells for 30.00 per share. The firms before-lax cost of debt is 10%, and its marginal tax rate is 25%. The firms currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Skyes beta is 1.516. The firms total debt, which is the sum of the companys short-term debt and long-term debt, equals 1.2 million. a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity. b. Now calculate the cost of common equity from retained earnings, using the CAPM method. c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r1 and rs as determined by the DCF method, and add that differential to the CAPM value for rs.) d. If Skye continues to use the same market-value capital structure, what is the firms WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock?
Return on Common Stock You buy a share of The Ludwig Corporation stock for $21.40. You expect it to pay dividends of $1.07, $1.1449, and $1.2250 in Years 1, 2, and 3, respectively, and you expect to sell it at a price of $26.22 at the end of 3 years. Calculate the growth rate in dividends. Calculate the expected dividend yield. Assuming that the calculated growth rate is expected to continue, you can add the dividend yield to the expected growth rate to obtain the expected total rate of return. What is this stock’s expected total rate of return (assume the market is in equilibrium with the required return equal to the expected return)?
The Cost of Equity and Flotation Costs Messman Manufacturing will issue common stock to the public for $30. The expected dividend and the growth in dividends are $3.00 per share and 5%, respectively. If the flotation cost is 10% of the issue’s gross proceeds, what is the cost of external equity, re?
Falon Corporation is issuing new common stock at a market price of $28. Dividends last year were $1.30 and are expected to grow at an annual rate of 7 percent forever. What is Falon's cost of common equity capital? a. 12.97% b. 11.97% c. 7.97% d. 15.79%
Investors in IBM common stock expect the firm to pay a dividend next year of $2.05 per share. Investors also expect these dividends to grow at a rate of 6%per year. The price of IBM common stock is currently$77per share. Based on this information, IBM’s current cost of common equity capital is closest to which of the following? A.2.66% B.6.00% C.8.66% D.3.34%
Calculate the cost of capital for a new common stock issue by a firm that paid a $1.80 dividend last year. The firm's dividends are expected to continue to grow at 7% per year forever. The price of the firm's common stock is now $30.00: a.7% b.14.32% c.13.42% d. 21%
Avril Synchronistics will pay a dividend of $1.10 per share this year. It is expected that this dividend will grow by 4% each year in the future. What will be the current value of a single share of Avril's stock if the firm's equity cost of capital is 13%? A. $8.55 B. $12.22 C. $13.44 D. $9.17
Credenza Industries is expected to pay a dividend of $1.50 at the end of the coming year. It is expected to sell for $61 at the end of the year. If its equity cost of capital is 9%, what is the expected capital gain from the sale of this stock at the end of the coming year? .... O A. $57.34 O B. $5.04 OC. $55.96 O D. $3.66 ..
Cullumber Wok Co. is expected to pay a dividend of $1.70 one year from today on its common shares. That dividend is expected to increase by 5.00 percent every year thereafter. If the price of Cullumber common stock is $17.00, what is the cost of its common equity capital? - Cost of common equity =?%
Jiffy Co. expects to pay a dividend of $3.00 per share in one year. The current price of Jiffy common stock is $60 per share. What is the cost of internal common equity (retained earnings) if the long-term growth in dividends is projected to be 9 percent indefinitely? a. 15 percent b. 14 percent c. 16 percent d. 13 percent